History Lesson: Asian Financial Crisis

Asian Financial Crisis: Japan Stocks Plummet

Asian Financial Crisis: Japan Stocks Plummet

Reasons for the Asian Financial Crisis

The Thailand Stumble

One of the reasons for this crisis was the Thai government’s decision to float the Thai baht after supporting the baht to prevent devaluation.  The collapse of the Thai currency, coupled with the massive foreign debt that the Thai government had accumulated made Thailand a bankrupt nation. This resulted in devaluation of the real estate and the stock markets, which in turn led many companies to fall into large debts or go bankrupt.

The Hong Kong Factor – Fears for the Chinese Communists

Another detectable cause of the Asian Crisis can be traced to the handover of Hong Kong sovereignty on July 1st, 1997.  At that time, the general public was worried that China might revert on its promise of unchanged financial system and principles.  The political uncertainty regarding the future of Hong Kong as an Asian financial centre led some investors to withdraw from Asia altogether and this shrink in investments only worsened the financial conditions in Asia.

The Credit Market gets Crunchy

The economist’s explanation for the Asian Crisis was the distortion of the lender-borrower relationship caused by inappropriate policies.  The decade before 1997 saw significant economic growth in Asia thanks to easy financing, and the economy in Asian countries got so heated that bubbles were created in the real estate and the stock markets. When the bubble finally burst, the prices of assets eventually collapsed, causing many defaults in bank loans.  During this panic mode, a domino effect was created, causing lenders to withdraw a large amount of credits from the Asian economy.  As a result a recession followed from this credit crunch.

Effects of the Asian Financial Crisis

Needless to say, the Asian Financial Crisis caused big drops in asset value throughout Asian economies. Smaller and financially insecure banks were bought out by larger banks, especially in Malaysia.  Many public companies that could not show effective regulation of their financial affairs were delisted.  For most of the affected countries, growth settled to a slower but more sustainable pace following the crisis.  China was relatively unaffected by the crisis when compared to the rest of Southeast Asia, but the crisis convinced China of the need to resolve the issues of its internal financial weaknesses.

At the Peak of the Asian Financial Crisis

Devalued Asian Currencies and the IMF rescue

In 1997, extensive layoffs shook the Thai workers market and the public lost confidence in the Thai baht, causing the baht to lose half its value. The stock market dropped 75% and even the most prominent finance company of Thailand until then, Finance One, collapsed.  The Korean won fell to from 800 per USD to 1700 and the Indonesia dollar exchange rate went from 2600 USD to 14000.

The IMF bailed Thailand out with more than 21 billion, but not without Thailand accepting a list of conditions and restrictions with it.  Indonesia was given 23 billion, which didn’t help inflation as investors had already lost confidence on Indonesian goods and their devalued corporate debts.

Singapore vs. Hong Kong

These two leaders in the Asian economy in the 80’s and 90’s took different approaches in face of the stock market plunge.  While Hong Kong intervened by purchasing open shares, Singapore chose not to directly intervene.  This difference was caused by the Hong Kong government and their reluctance to allow the Hong Kong dollar to depreciate while the Singapore government preferred to gradually depreciated its dollar 20% to allow for a soft landing of the economy.

Return of the dragon

In the midst of the crisis, Korea managed to make a sharp rebound by restructuring car makers like Kia and Hyundai. While the Korean GDP tripled since 1997, but at the same time debt-to-GDP ratio doubled. In 2001, Thailand finally saw its recovery as its tax revenue increased to allow it to pay back its debts to the IMF. The Hong Kong government used its reserves to buy HK$120 billion worth of shares in various companies in 1997 in an effort to stop speculators. It made a HK$30 billion profit when the shares were sold in 1999.

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