Traders on the Argentine Stock Exchange look at trading figures for October 27 as prices fall during an international crisis that began in Hong Kong stocks. Argentine stocks fell 13.73 percent, the worst in six years. AFP PHOTO/Daniel LUNA (Photo by DANIEL LUNA / AFP) (Photo by DANIEL LUNA/AFP via Getty Images) Daniel Luna | AFP | Getty Images The 1997 Asian financial crisis culminated in recessions in economies across the region, amid market turbulence characterized by currency collapse, capital flight and bank failures. Asia’s financial environment now bears some striking similarities to the period immediately before the crisis, according to HSBC chief economist Frederick Neumann. Rising U.S. bond yields, a weak Japanese yen and technological optimism dominated the financial environment in the run-up to the crisis, Neumann wrote in an Aug. 31 note. What does Neumann think is similar? Neumann highlighted high U.S. Treasury yields as a key similarity to the pre-crisis period of 1997. Benchmark U.S. 10-year bonds, for example, rose from 5% in October 1993 to around 8% in November 1994. Even in April 1997, yields were around 7%, about 200 basis points above where they had been four years earlier, Neumann noted. Today, 10-year Treasury yields have risen from a low of 0.5% in August 2020 to around 4.79% early Tuesday. “It’s true that it took six years; but this year alone, the yield has risen about 80 basis points from 3.9% in February,” Neumann said. Last month, the US Treasury announced that it will focus on the 10- to 30-year portion of the market for buybacks. The government will “at least double” the maximum size of its buyback operations, from $2 billion to “at least” $4 billion, the department said. Stock Chart IconStock Chart IconAnother similarity is the recent movements of the Japanese yen. In April 1995, the yen was trading as low as 80 against the US dollar. By April 1997, it had risen to 130, a depreciation of about 55%. Today, the yen has weakened 57% from a low of around 103 in January 2021 to a high of 163 in July, before a rare joint intervention by Washington and Tokyo strengthened the currency to its current levels of around 160. Markets are currently weighing the possibility of another intervention. Stock Chart IconStock Chart IconIn the run-up to the 1997 crisis, markets were caught up in technological optimism amid the advent of the Internet. Now, Neumann noted, the rise of AI is stoking similar optimism. From financial vulnerability to “demand vulnerability” But Neumann argued that the differences between 1997 and 2026 “outweigh the similarities.” Most significantly, he said, most Asian economies were capital importers in the 1990s – meaning they received more investment from abroad than they invested abroad – and had savings that were insufficient to meet their spending commitments. “Rising dollar financing costs and a wobbly yen that made investors nervous were therefore key catalysts for stress in the region,” Neumann said. Today, Asian economies are capital exporters and, as such, higher US financing costs and a weaker yen are not major pressure points. However, this does not mean that the region will emerge unscathed. The most pertinent issue for Asia, Neumann said, is its dependence on the rise of AI hardware in the United States, which is driving many of the region’s economies. Electronics exports linked to the AI boom have underpinned growth in South Korea, Japan, Taiwan and Singapore, he noted. “Instead of financial vulnerability as in the 1990s, Asia now faces demand vulnerability,” Neumann said. If rising U.S. bond yields and financing costs weigh on the AI hardware boom, or the yen disrupts global financing markets, demand for the region’s goods could falter and growth will fizzle out, he warned. Choose CNBC as your preferred source on Google and never miss a moment from the most trusted name in business news.
