The Asian financial crash that occurred in August 1997 has resulted in destructive results for the economies and financial markets of most South East Asian countries. The aftermath of this crash is not yet clear, but it is apparent that the results of the crash will continue to accumulate, not only in the region, but also in other countries and regions. So far, Russia and Japan have already been harmed badly by this crash, and the worst is yet expected for China, and Latin American economies may follow too. While European and American economies and money markets have not suffered at all, analysts believe that on the long run, the Asian crash is going to have a detrimental impact on the global economy and market markets.
The Crash of Asian Economies
Outline
Thesis Statement: The Asian financial crash which took place in August 1997 is threatening to extend to other countries and regions of the world.
I-Origin of the crisis
A-Devaluation of Chinese currency
B-Unsecured loans
C-Mounting tensions on Asian currencies
II-Aftermath of the crash
A-Regional catastrophe
B-Losses in industrial sectors
C-Impacts on other regions of the world
1-The US
2-Japan
III-Expectations of another Crash in China
A-Extension of the chain reaction
B-Threats of currency devaluation
IV-Conclusion
During the 1990s, many South East Asian countries became known as the emerging economies. For foreign investors from Europe and the United States, these economies were very lucrative and attractive because of their high growth rates. This meant that an investor pouring money into these markets was capable of double his money in a much shorter period of time than if he had made the investment in Europe or the US. To make an investment in any market or industry, the most important factor needed is capital. In the modern world of business, corporate capital is raised through stock markets. Corporations attract investors who purchase corporate stocks in order to become partners. These stocks can be purchased and sold easily in the markets such that any individual, institution or government can enter or exit the capital markets by completing a simple financial transaction through a broker. The prosperity of the 1990s which persisted throughout the early years of the 1990s in South-Asian emerging economies have been based on these dynamics and concepts of modern business and capital markets. Once the dynamics of capital markets were interrupted by economic tension and instability, capital markets in South East Asian emerging markets immediately collapsed, threatening to lead to a global recession. It is impossible to evaluate any developments in financial markets or regional economies without taking into consideration a number of important factors. These factors include the economic and political policies of the state, the activity of exports and imports in the region, and more importantly, the way international investors feel about the market.
The South East Asian crash that took place in August 1997 had actually been expected for over a year. Analysts believe that the roots of the crash originated in China when in 1994, the Chinese government decided to devaluate its currency by 35% and to reduce its taxes on exports by 17%. China has a huge market size and accordingly, these two factors had very powerful impacts on the regional financial markets and economies. As a result of these two actions, Chinese products became very competitive and relatively cheap when compared to products from countries such as Korea, Indonesia, Malaysia, Thailand and Philippines. As a result, international demand increased on Chinese products while products from these countries became less demanded since they were relatively more expensive. When exports go down in any economy, the currency starts to lose its value. Once the currency starts to drop in value, investors start to run away from the market. To prevent this, governments support their currencies by buying foreign currency, something which puts a lot of pressure on the economy. This is exactly what South East Asian countries have been doing since China devaluated its currency in 1994 (“Too late for a gentle landing” 70).
While pressures were mounting on South East Asian currencies, the economies of these countries were not managed well. There were too high risks involved. Loans were available to any investors or companies with stocks as collateral. This is a weak policy that could yield very serious results. Usually, collateral has to be in real estate or a fixed asset, but liquid assets such as stocks can lose their value at any time, which means that the collateral can become without any value at all.
Thus, by the summer of 1997, the economies of South East Asian countries were burdened with risky debts without real protection. Once the tension grew too much in the market, investors began to get out of these markets while the governments tried to stop this by pouring more money into their economies. For example, the Malaysian government established a $20 billion fund to support shares and keep foreign investors calm. The result, however, was not positive and instead, the market dropped immediately by another 3% (“Too late for a gentle landing” 70).
The problem with financial crises is that they are like a chain reaction, one resulting in another. When the Asian crash started in Thailand in August 1997, markets of the region also began to suffer. Indonesia, Malaysia, Philippines and even Japan suffered similar problems. All these economies had similar problems. They had huge risky debts in their financial markets while the currencies were overvalued. The financial drainage of funds resulting from these debts, the collapse of the currencies and the escape of investors from these markets had substantial impact on the major industries that were invested in these countries (“The downpour in Asia” 61).
The auto industry is one that has suffered considerable damage for sure. In the early 1990s, many large companies such as Ford, GM and others had opened production plants in these countries. Once economic tensions began to mount, these companies found out that their products were not selling, neither in the local markets nor in the regional markets, especially that the impact was regional and even international. Therefore, their financial partners and investors began leaving them immediately, leading to a major recession that worsened the situation in South East Asian economies (“The downpour in Asia” 62).
The auto industry alone has so far declared a loss of $5 billion in a market which will be expected to remain sluggish and in recession for at least two years. Nevertheless, some optimists believe that by the end of 1999, the situation would be back to normal (“The downpour in Asia” 62).
The impact of the Asian crash has already had a number of detrimental impacts on international economies. The American economy, ranking first in size worldwide, has been slightly influenced so far, but the Japanese economy ranking second, has been badly exposed. The Nikkei has lost more than 6% of its value where as the over-the-counter index has dived 8% low. Although the Japanese government has announced several reforms even before the Asian crash took place, these reforms were not sufficient to make a positive change. What made the situation even worse was that Japan was looked at as the only country in Asia that could contribute to bailing the crashing economies of its neighbors. With Japan itself joining the crash, this was no longer possible, thus leaving the region at the brink of collapse (“Over the counter or over the barrel” 86-87).
In order to reduce the destructive impact on the Japanese economy, the government has initiated requirements that made it difficult for investors to get out of the market. As a result, the behavior of investors was similar to the panic of a trapped animal, thus, doing anything to get out, even if they had to bite their wounds and sell at very low prices (“Over the counter or over the barrel” 87).
The Asian crash originated in China, and analysts believe that it is going to end there. Indeed, an economic analysis of the chain reaction that started in China in 1994 shows that this will fire back on the Chinese economy in the foreseen future. After the collapse of the economies of South East Asian countries, the currencies of these economies are almost valueless. This means that their exports will increase at the expense of Chinese exports, since they are cheaper now. This will put a lot of tension on the Chinese economy, and less markets will be purchasing Chinese products. At the same time, the Chinese economy is not yet prepared to meet such a situation. Corruption is widely spread; the banking system is not adequately running; and more importantly, labor and political unrest are far from over. The degree to which China can stand against these trends cannot be anticipated (McCarthy 87).
The only positive aspect so far related to the Chinese economy is that the government of China has vowed to prevent the devaluation of its currency for at least two years. While this gives confidence to foreign investors, it is not assuring on the long run. One reason is that investors will expect losses once devaluation starts. Accordingly, they will start to get out of China before devaluation, which could make China’s downfall very painful, both to China’s economy and to investors. The impact on world economies could also be serious. When in 1998 the Russian economy collapsed, it resulted in a global turmoil in international money markets. The danger is that China’s economy is twenty times larger than the Russian economy, which means that the threat could be extremely serious (McCarthy 87).
Over a year has passed since the onset of the Asian financial crash in 1997. This crash has initiated an international chain reaction that had dramatic financial consequences on countries such as Korea, Japan, and Russia. So far, the American and European financial markets have been slightly influenced, but this cannot last for long. One reason is that sooner or later, American and European exports are going to fall as other countries will find their products too expensive, especially after the crash. Another reason is that more economies are facing more difficulties every day, which means that it is likely that more regional crashes are expected, most perhaps in Latin America. The world has its eye on China now, for it is in China that the final blow is going to be happen. If China falls, then the end of this century is going to be very gloomy, especially for most nations of the world.
Works Cited
McCarthy, Terry. “Is China Next?” Time, September 21: 87.
“Over the counter or over a barrel?” The Economist, November 23, 1997: 86-87.
“The downpour in Asia.” The Economist, November 1, 1997: 61-62.
“Too late for a gentle landing.” The Economist, September 6, 1997: 69-70.