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Asian financial crisis

The Asian financial crisis was a financial crisis that started in July 1997 in Thailand, and affected currencies, stock markets, and other asset prices of several Asian countries, many part of the East Asian Tigers.

Indonesia, South Korea and Thailand were the countries most affected by the crisis with Malaysia, Philippines and Hong Kong also hit by the slump. Mainland China and Taiwan were relatively unaffected. Japan was not affected much by this crisis but was going through its own ongoing long-term economic difficulties.


Until 1996, Asia attracted almost half of total capital inflows to developing countries. However, Thailand, Indonesia and South Korea had large external deficits and the maintenance of pegged exchange rate encouraged external borrowing and led to excessive exposure to foreign exchange risk in both the financial and corporate sectors.

The Asian crisis started in mid-1997 and affected currencies, stock markets, and other asset prices of several South East Asian economies. Triggered by events in Latin America, Western investors lost confidence in securities in East Asia and began to pull money out, this led to a snowball effect.


From 1985 to 1995, Thailand's economy grew at an average of 9%. On May 14 and May 15, 1997, the baht, the local currency, was hit by massive speculative attacks. On June 30, Prime Minister Chavalit Yonchaiyudh said that he would not devaluate the baht, but Thailand's administration eventually floated the local currency, on July 2.

In 1996, an American hedge fund had already sold $400 million of the Thai currency. From 1985 until July 2, 1997, the baht was pegged at 25 to the dollar. The baht dropped very swiftly and lost half of his value. The baht reached its lowest point of 56 to the dollar in January 1998. Thai stock market dropped 75% in 1997. Finance One, the largest Thai finance company collapsed. On August 11, the IMF unveiled a rescue package for Thailand with more 16 billion dollars. The IMF approved on August 20, another bailout package of 3.9 billion dollars.


The Philippines central bank raised interest rates by 1.75 percentage points in May and again by 2 points on June 19. Thailand triggered the crisis on July 2. On July 3, the Philippines central bank was forced to intervene heavily to defend the peso, it raised the overnight rate from 15 percent to 24 percent.

Hong Kong

In October 1997, the Hong Kong dollar, which was also pegged at 7.8 to the US dollar, came under speculative pressure. Monetary authorities spent more than US$1 billion to defend the local currency. Stock markets become more and more volatile, between, October 20 and October 23, Hang Seng Index dipped by 23%. Hong Kong Monetary Authority and the People's Republic of China promised to protect the currency. On August 15, 1997, Hong Kong raised overnight rates from 8 percent to 23 percent.

South Korea

South Korea is the world's 11th largest economy. In July, South Korea's third largest car maker, Kia Motors asked for emergency loans. Moody's lowered the credit rating of South Korea. That triggered a sharp fall in stock markets. On November 7, 1997, the Seoul stock exchange fell 4 percent. On November 8, it plunged 7 percent, the biggest one-day decline. On November 24, stocks fell another 7.2 percent.


In 1997, Malaysia had a large current account deficit of over 6 percent of GDP. In July, the Malaysian ringgit was attacked by speculators. Malaysia floated its currency on August 17, 1997 and the ringgit fell sharply. Four days later, Standard & Poor's downgraded the debt rating of Malaysia. A week later, the rating agency downgraded the rating of Maybank, the largest bank of Malaysia. The same day, the Kuala Lumpur Stock Exchange's plunged at 856 points, its lowest point since 1993. On October 2, the ringgit dropped again. Prime Minister Mahathir bin Mohamad introduced capital controls. However, the currency collapsed again in late 1997 when Mahathir bin Mohamed announced that the government would spend 10 billion ringgit in a road, rail and pipeline project.

In 1998, output of most sectors declined. The construction sector contracted 23.5 percent, manufacturing shrunk 9 percent and the agriculture sector 5.9 percent. Malaysia's gross domestic product plunged 6.2 percent in 1998.


In June 1997, Indonesia seemed far from crisis. Unlike Thailand, Indonesia had low inflation, a trade surplus of more than 900 million dollars, huge foreign exchange reserves of more than 20 billion dollar, and a good banking sector.

In July, when Thailand floated the baht, Indonesia's monetary authorities widened the rupiah trading band from 8 percent to 12 percent. The rupiah came under severe attack in August. On 14 August 1997, the managed floating exchange regime was replaced by a free-floating exchange rate arrangement. The rupiah dropped further. The IMF came forward with a rescue package of 23 billion dollar, but the rupiah was sinking further amid fears over corporate debts, massive selling of rupiah, strong demand for dollars. The rupiah and Jakarta Stock Exchange touched a new historic low in September. Moody's eventually downgraded Indonesia's long-term debt to junk bond. The inflation of the rupiah and the resulting steep hikes in the prices of food staples led to riots throughout the country. In February 1998, president Suharto sacked the governor of Bank Indonesia, but this proved insufficient. Suharto was forced to resign in mid-1998 and B. J. Habibie became president.

Mainland China

The People's Republic of China was largely not affected by the crisis because of the non-convertibility of the renminbi and the fact that almost all of its foreign investment took the form of factories on the ground rather than securities. While the PRC had and continues to have severe solvency problems in their banking system, most of the deposits in PRC banks are domestic and there was not a run on the banks.

The United States and Japan

The "Asian flu" also put pressure on the United States and Japan. Their economies did not collapse, but they were severely hit. On October 27, 1997, the Dow Jones industrial plunged 554-point, or 7.2 percent, amid ongoing worries about the Asian economies. New York Stock Exchange briefly suspended trading. Japan was affected because its economy is prominent in the region Asian countries usually run a trade deficit with Japan because the latter's economy is more than twice the size of the rest of Asia together, and seven times China's. About 40 percent of Japan's exports go to Asia.

GDP real growth rate slowed dramatically in 1997, from 5 percent to 1,6 percent and even sank into recession in 1998. Moreover, the Asian crisis led to a drop in consumer and spending confidence, and to major bankruptcies in Japan. The Asian financial crisis also led to more bankruptcies in Japan.


The Asian crisis affected currencies, stock markets, and other asset prices of several Asian countries. Indonesia, South Korea and Thailand were the countries most affected by the crisis. The economic crisis also led to political upheaval, most notably culminating in the resignations of Suharto in Indonesia and Chavalit Yongchaiyudh in Thailand. There was a general rise in anti-Western sentiment, with George Soros and the International Monetary Fund in particular singled out as scapegoats. Culturally, the Asian financial crisis killed the idea of Asian values which presumed that East Asia had found a political and economic structure that was superior to the West. The Asian crisis also raised the economic prestige of the People's Republic of China considerably.

The Asian crisis contributed to the Russian and Brazilian crisis in 1998, because after the Asian crisis, banks were relectant to lend to emerging countries.

See also