The Asian Financial Storm

introduce

It collapsed in July 1997.

The beginning of the Asian financial crisis can be traced back to July 2, 1997. On that day, the Thai government announced a managed float in the Thai baht and called on the International Monetary Fund (IMF) to provide "technical assistance". On that day, the Thai baht fell by about 20% against the US dollar. This became the trigger for the Asian currency crisis. Within a week, the governments of the Philippines and Malaysia actively intervened to defend their currencies, while Indonesia also intervened and allowed the currency to fluctuate within an expanded trading range - somewhat like a float, but with a lower limit, at which monetary authorities took action to defend their currencies. The currency further declined. At the end of the month, Malaysian Prime Minister Mahathir criticized "rogue speculators" and "currency collapse", and named notorious speculator and hedge fund manager George Soros as personally responsible for the depreciation of the ringgit.   Participate to varying degrees. (1) The stock market and real estate market have also felt pressure. Although the volatility of stock price decline tends to ease, it still shows a downward trend in most cases. one thousand nine hundred and ninety-seven

On October 27th, this crisis had a global impact and caused a huge response on Wall Street that day. The Dow Jones Industrial Average fell 554.26 points, or 7.18%, the largest drop in history, causing stock exchange officials to suspend trading.

start

Nowadays, it is quite common for affected Asian currencies to be inconsistent with their economic fundamentals. For many years, if not decades, many Asian economies have pegged their currencies to the US dollar. In the first few years, as part of export promotion, they may maintain low value. Almost all Asian economies mentioned in the Asian financial crisis have made promoting exports the foundation of their economic strategies.   (3) Hong Kong has always been unique due to its laissez faire economic policy.

The appreciation of the US dollar against the Japanese yen and third country currencies means that as long as these East Asian countries continue to fix their own currencies against the US dollar, their competitiveness will decrease. It seems that under these fixed exchange rates, countries have been trying to defend overvalued exchange rates for too long, long after everyone realized that the currency was overvalued.

In this way, the relevant monetary authorities provide a good one-way bet for everyone. If you bet money, the worst case scenario is nothing, you can get the money back. However, overwhelming odds are advantageous for winning, as speculation itself becomes overwhelming. With this kind of "game", no wonder countries like Malaysia find an seemingly infinite number of speculators willing to bet on the ringgit.

In addition to the currency turmoil in 1997, the Asian crisis also involved other factors. Prior to this, Asia had always been the "favorite" of global investors this month. For example, there are many listed companies in Australia that invest in Asian investment funds. In the past, the Australian Stock Exchange has been very active in attempting to list Asian companies in Australia. Now, it cites an Asian index, which is an index of all listed companies in Australia that primarily operate or invest in Asia.

There is no indication that Asian stocks listed in Australia have performed well. However, this is not the case elsewhere. A large amount of speculative funds have entered real estate and real estate development. Speculation is self-sufficient. Thailand, Malaysia and the Philippines have produced asset price inflation foam. Of course, now the speculative foam has burst, which can be seen from the decline in the value of real estate. In the second half of 1997, the annual rental costs of office buildings in Bangkok, Manila, Kuala Lumpur, and Hong Kong decreased by 56%, 37%, 36%, and 27%, respectively. (4) Business Weekly claimed that prior to the crisis, "the White Elephant construction project, based on bribery business ethics, and overcapacity in too many industries." (5)

Since the outbreak of the crisis, there have been many criticisms of corporate governance, accountability, and transparency in the financial system. These issues have been resolved in a package agreed upon with the International Monetary Fund, which will be carried out independently by countries such as Malaysia without any indication from the International Monetary Fund. All these accountability and transparency issues are important. However, as of July 1997, speculation in Asian assets was unlikely to be influenced by more and better underlying asset information. This rational consideration is overlooked, which is the essence of speculative prosperity.

Since the events in 1997, there has been an important view that the Asian crisis was caused by intervention policies implemented by the governments of the economies involved. Australian Finance Minister Ted Evans directly accused the government of intervening in relevant Asian economies:

Asian countries have repeated many mistakes made by Western countries (many of which still exist to varying degrees). It is a difficult habit to get rid of the desire for the government to prioritize specific investments rather than putting the overall economic environment on track. Although many governments now see the issue of trying to "pick winners", they still tend to lean towards policies that seem more inclined to pick losers. The most obvious example is the incentive given on the basis that investment will not occur.

Although there may not be obvious fiscal issues in this situation, when policies become unsustainable (for any reason), the costs in the fiscal account will inevitably come under pressure. If the mechanisms used to create investment incentives include the direction of lending through the banking system, which is still under implicit or explicit government guarantees, then the danger is extremely great - especially because its scale was hidden before the crisis.

In fact, many Asian economies have been heavily intervened by governments. However, attributing the current financial problems to government intervention without acknowledging the government's role in promoting rapid economic activity and living standards in Asia in the early stages seems unfair.

In a recent press statement, the World Bank reminded us that "no other country in the world has achieved faster economic growth and significantly reduced poverty than East Asia. South Korea, Malaysia, and Thailand have actually eliminated poverty, and Indonesia can also achieve this goal." (7) This means that the development model in East Asia should not be abandoned so casually. In fact, an official from the United Nations Conference on Trade and Development (UNCTAD) said that the problem in 1997 can be attributed to attempting to relax regulations on some Asian economies. Under pressure from developed countries, some of these economies have opened up their financial systems. However, institutional structures are not suitable for a market driven environment. Zaibatsu (Korean conglomerates) followed closely behind, becoming multinational corporations and their activities. Becoming less transparent and more difficult to monitor For example, regulatory/supervisory/accountability structures are insufficient to address the temptation of financial institutions entering speculative real estate and similar businesses. Relaxing regulation means that inexperienced banks are suddenly pushed into a competitive and speculative environment. On one hand, they absorb a large amount of foreign deposits, and on the other hand, they face real estate transactions.

The International Monetary Fund has recognized the importance of institutional deficiencies, which supports an explanation that the process of relaxing controls in East Asian countries has not addressed the adequacy of institutional structures. These institutional structures were designed for different periods. Like any other social organization, the establishment of a free market also requires attention to rules and institutions operating under them. However, policymakers around the world often fall into the mindset trap of implementing deregulation by dismantling structures, without considering what may or should be used to replace them.

In many ways, Asian economies are similar to emerging economies of the old communist bloc. The International Monetary Fund (IMF) has been actively providing suggestions for former communist countries to dissolve regulatory agencies. Former communist countries abolished central planning institutions, but did not establish legal and institutional structures - game rules - that could promote the development of capitalist economy. Asian economies attempting to break the government/financial/industrial development model are also facing similar dangers.

The President of the International Monetary Fund, Michel Condosu, commented on the uniqueness of the Fund's plans in Thailand, Indonesia, and South Korea, which are "significantly different" from the programs traditionally supported by the International Monetary Fund:

The core of each plan is not the tightening measures aimed at restoring macroeconomic balance, but a series of strong and far-reaching structural reforms aimed at restoring market confidence. The reforms included in these plans will require significant changes in domestic business practices, corporate culture, and government behavior.

Martin Feldstein, an influential commentator and director of the National Bureau of Economic Research in the United States, stated that when the International Monetary Fund (IMF) began intervening in the Asian relief plan, it was keen to apply it to the former Soviet Union and its satellite countries. In addition, it is enthusiastic about applying traditional Latin American mixed policy prescriptions. However, the analogy from communism to market economy is incorrect, Latin

The policy mix in the Americas is inappropriate. Furthermore, these measures are not necessary to address the issue of the country's entry into the international capital market - that is the real problem. On the contrary, we have made unnecessary interventions in the internal operations of the relevant countries. In his own words:

The legitimate political system of a country should determine its economic structure and the nature of its system. A country in urgent need of short-term financial assistance cannot grant the International Monetary Fund moral rights, and its technical judgment can replace the outcome of the country's political system. (10)

Japan

Japan is facing pressure to stimulate its economy and increase imports from the region, thereby contributing to the economic recovery of Asian economies. Japan is a major surplus country and is most likely to accept a surge in imports. The importance of Japan to other countries in the region cannot be overemphasized. Exports to Japan account for 12% of Malaysia's gross domestic product, while exports to Indonesia, South Korea, Taiwan Province, and Thailand account for 5% to 7%. (11) Therefore, the United States has long urged Japan to stimulate its economy and serve as an engine of Asian growth. (12) If you remember, Japan's approach is exactly the opposite. For example, Business Week says:

Unless Japan also makes some serious commitments, all these measures (crisis response policies) will be meaningless. So far, Tokyo has become one of the main culprits of this crisis. It devalues the yen and increases exports at the expense of neighboring countries. It has suppressed domestic growth and ignored the demand for importing more Asian goods Getting Japan to join this effort will be a major challenge. (13)

As the crisis continues, Japan's responsibility is receiving increasing attention. Some people criticize Japan for not taking decisive action as the international community hopes. On March 27, 1998, the Japanese government announced a $127 billion fiscal stimulus plan for public works such as science, technology, and telecommunications infrastructure. Australian Finance Minister Peter Peter Costello welcomed the plan, stating that "the Japanese economy has been in a slump for most of the past decade, and importantly, it has once again become a driving force for the region." (14) An estimate shows that Japan's economic growth will increase by 1.1%. (15) Since that statement, people seem to agree that Japan needs to do more. For example,

Against the backdrop of sustained international attention, the Japanese yen has been declining for most of the past 18 months or so. In mid June 1998, the exchange rate of the Japanese yen against the US dollar dropped to 147 yen, a 23% decrease from 113 yen against the US dollar a year ago. The depreciation of the Japanese yen has increased the possibility that other affected Asian economies will be forced to undergo a new round of depreciation. China's fixed exchange rate against the US dollar has always been an important source of stability in the region. However, this relationship is considered to be threatened by the depreciation of the Japanese yen. Therefore, the governments of the United States and Japan intervened on June 17th and implemented a package of measures, including the purchase of Japanese yen by the United States. This seems to stabilize the current yen/dollar relationship.

The role of the International Monetary Fund in the Asian financial crisis

The International Monetary Fund has arranged rescue plans for three countries facing serious crises, namely Thailand, Indonesia, and South Korea. When examining the various options below, it should be noted that there are many other measures besides the ones needed to quickly resolve currency issues. These package measures include measures that affect the structure of relevant economies, such as corporate sector accountability, legislative monopoly privileges, and prudent supervision of financial institutions. The package plan of the International Monetary Fund has been criticized. However, due to the detailed nature of the Asian package in domestic political decision-making, criticism is particularly harsh.

Thailand

Since mid-1996, Thailand has experienced a sharp decline in exports and a slowdown in growth, difficulties in the real estate market, a sharp decline in the stock market, and a weak fiscal situation. Next is "a series of increasingly serious attacks on the Thai baht." (17)

On August 20th, as part of the overall reform plan, the International Monetary Fund approved the provision of up to $3.9 billion in standby credit to Thailand, of which $1.6 billion is immediately available, the rest depends on performance targets and plan reviews. The package of measures under this plan includes:

A new exchange rate system based on the floating Thai baht

Fiscal policies aimed at generating surplus

Termination of support for bankrupt financial institutions

Strengthen financial regulation

Accelerate privatization, and

Pay more attention to secondary education and training.

In the discussions prior to the announcement, Australia, Hong Kong, Malaysia, and Singapore each pledged to provide $1 billion, while Japan pledged to provide $4 billion. Indonesia and South Korea each pledged $500 million, while the World Bank and Asian Development Bank agreed to commit $1.5 billion and $1.2 billion respectively.

Indonesia

Indonesia has been hit hardest by the Asian financial crisis, with a significant drop in exchange rates and stock prices. The International Monetary Fund believes that Indonesia's structural weaknesses make it particularly vulnerable to adverse external developments. It lists domestic trade laws and regulations, import monopolies, lack of transparency and data deficiencies in the business environment, weak and unable banking systems to withstand the Southeast Asian financial crisis, and high overseas debts of enterprises after experiencing a stable history. It has been proven that this exchange rate is unsustainable. (18)

On November 5th, the International Monetary Fund announced a package plan that includes providing $10.14 billion in standby credit to Indonesia. The remaining parts of the packaging include:

Fiscal measures aimed at maintaining surplus

Tight credit policy

Close non viable banks

Liberalization of foreign trade and investment

Breaking domestic monopolies

Private sector participation in infrastructure construction

Expand privatization plans, and

Enhance transparency in public sector activities to improve governance quality.

In addition to loans from the International Monetary Fund, the World Bank has committed $4.5 billion and the Asian Development Bank has committed $3.5 billion. Indonesia's own foreign assets (estimated to be equivalent to 6 months of imports) have pledged to support a package plan. In addition, Australia, Chinese Mainland, Hong Kong, Japan, Malaysia, Singapore and the United States all said that if the credit facilities of the International Monetary Fund were insufficient, they would be prepared to consider supplementing funds to support the plan. Australia's commitment is as high as $1 billion.

Since the Indonesian package was approved, the Indonesian government seems to have lost confidence in the International Monetary Fund's package, and its implementation has been delayed or avoided. On February 11, 1998, the Indonesian government proposed the establishment of the Indonesian Monetary Authority. The International Monetary Fund is concerned about this, and the Indonesian government is seeking solutions beyond the agreed package. The International Monetary Fund has warned Indonesia not to adopt the proposal, and the Indonesian government has criticized the IMF's plan for failing to improve the Indonesian economy. In March of this year, the International Monetary Fund postponed payments to Indonesia as planned and warned that the crisis in Indonesia could worsen the situation throughout Asia. On March 20th, Indonesia announced a 5% tax on short-term capital flows. The decision was revoked on March 23rd. Believing that Indonesia's economic policy is unstable during this period may be a bit understated. The unpredictable decisions during this period are likely to have actually exacerbated Indonesia's predicament. The experience of Indonesian rupiah proves this point. Although other Asian currencies bottomed out at the end of 1997 or early 1998, they have rebounded and are now at least $40 lower in value (against the US dollar) than they were at the beginning of 1997. Unfortunately, the Indonesian rupee has fallen by over 80 US dollars. The US dollar exchange rate briefly rose in January 1998 and then fell to a new low in June 1998. A dilemma of dilemma. The experience of Indonesian rupiah proves this point. Although other Asian currencies bottomed out at the end of 1997 or early 1998, they have rebounded and are now at least $40 lower in value (against the US dollar) than they were at the beginning of 1997. Unfortunately, the Indonesian rupee has fallen by over 80 US dollars. The US dollar exchange rate briefly rose in January 1998 and then fell to a new low in June 1998. A dilemma of dilemma. The experience of Indonesian rupiah proves this point. Although other Asian currencies bottomed out at the end of 1997 or early 1998, they have rebounded and are now at least $40 lower in value (against the US dollar) than they were at the beginning of 1997. Unfortunately, the Indonesian rupee has fallen by over 80 US dollars. The US dollar exchange rate briefly rose in January 1998 and then fell to a new low in June 1998.

Political instability has exacerbated economic instability in Indonesia. By May 1998, Indonesia had suffered from riots and racial violence. On May 21st, President Suharto resigned and was succeeded by his deputy BJ Habibi. President Habibi quickly announced a series of political reforms and reforms aimed at overcoming favoritism. (19) According to further revisions to the agreement with Indonesia, the International Monetary Fund is scheduled to allocate funds to support the balance of payments in early June 1998. However, due to political turmoil, the International Monetary Fund was unable to conduct the necessary review of Indonesia in early May. The International Monetary Fund is now expected to provide new funding in early or mid July. (20)

Korea

The problem in South Korea emerged in early 1997 as some highly leveraged corporate groups or chaebols went bankrupt due to excessive investment in steel and cars, and their profitability weakened with cyclical declines. Bankruptcy has weakened the financial system, with non-performing loans reaching 7.5% of GDP. The decline in stock prices further reduces the value of bank equity. All of these have led to a sharp decline in external financing.

On December 4th, the International Monetary Fund announced a package plan that includes providing $21 billion in standby credit to South Korea. The package of measures agreed upon by South Korea includes:

Stabilize the market with high interest rates and tight monetary policy.

Tight fiscal policy

Strengthen the financial system through firm exit policies, market and regulatory discipline, and increased competition.

Further trade liberalization

Relax restrictions on foreign ownership, and

It is easier to lay off workers.

In addition to funding from the International Monetary Fund, the World Bank has stated that it will provide $10 billion to support specific structural reforms. The Asian Development Bank has pledged to provide an additional $4 billion. As a second line of defense, Australia, along with Belgium, Canada, France, Germany, Italy, Japan, the Netherlands, Sweden, Switzerland, the United Kingdom, and the United States, has stated that they are prepared to prevent the need for additional lines of defense. Resources, consider supplementing financing. This "second line of defense" is expected to exceed $20 billion. (22) The second line of defense was launched during Christmas, and the Minister of Finance announced an early withdrawal of $8 billion to supplement support arrangements. Australia's share is expected to be 330 million US dollars.

Philippine

In addition to the three countries mentioned above, the Philippines should also be mentioned as it is now part of the International Monetary Fund's adjustment plan. This plan predates the 1997 Asian financial crisis, and its scale is completely different. After expanding fund loans in July 1997, the total amount of loans available to the Philippines was 1.037 billion US dollars, far lower than other Asian countries. (23) However, the delay was in response to regional capital market turbulence and fluctuations in the Thai baht on July 2nd.

Where will it end?

By the end of June 1998, there seemed to be considerable volatility in the currency and stock markets, but the trend stopped falling and the market seemed to be far from the low point. In terms of its currency value and stock market performance, even Indonesia has emerged from a trough. However, Indonesia now seems to have returned to the lowest currency level in this incident. Of course, a relatively healthy recovery in financial markets does not necessarily mean that the underlying economy has returned to health.

It should be remembered that after the 1987 Wall Street crash (ultimately becoming the world stock market crash), people were concerned that the massive destruction of wealth could flow into the real economy. People are concerned that this collapse may mean fleeing to liquid and safe assets, and withdrawing credit for industrial purposes. Central banks around the world intervene quickly to ensure market liquidity is maintained. Fortunately, this collapse did not create enough serious ripples, which greatly affected the real economy. The fear of that type of collapse in 1929 was alleviated, and the financial crisis remained mainly limited to the financial sector. It is still too early to determine whether the Asian financial crisis will have such an impact on the most affected East Asian economies. The Chinese predicament in Indonesia is clearly the worst, and the impact of the financial crisis is also severe. The living standards of the majority of the population have sharply declined, making the financial crisis there a serious economic, social, and political crisis. People hope that other countries in the region can escape in a way closer to the 1987 plane crash, rather than Indonesia suffering from the 1929 plane crash. The consensus seems to be that from 1999 onwards, most parts of Asia will temporarily resume growth, initially at a slow pace, but ultimately returning to a faster growth rate. People hope that other countries in the region can escape in a way closer to the 1987 plane crash, rather than Indonesia suffering from the 1929 plane crash. The consensus seems to be that from 1999 onwards, most parts of Asia will temporarily resume growth, initially at a slow pace, but ultimately returning to a faster growth rate. People hope that other countries in the region can escape in a way closer to the 1987 plane crash, rather than Indonesia suffering from the 1929 plane crash. The consensus seems to be that from 1999 onwards, most parts of Asia will temporarily resume growth, initially at a slow pace, but ultimately returning to a faster growth rate.

Japan was once a model of rapid economic growth in Asia. In fact, it is the inspiration for the development strategies of other developing economies in Asia. Now, to some extent, Japan may be seen as an example of what could happen if the government delays relaxing regulations for too long.

Among the severely affected Asian economies, South Korea is the most mature. However, some of China's most famous chaebols or corporate groups are facing pressure. Zaibatsu faced problems before the crisis - for example, automaker Kia, which went bankrupt in 1997 before the crisis was exposed, has now been effectively nationalized. To a large extent, its problems stem from global overcapacity in automotive production and additional issues of new entry into foreign automotive markets. A large company that once seemed healthy enough is now in trouble. Samsung's debt ratio is 267%. As part of the International Monetary Fund's package of measures to overcome the crisis, interest rates have risen significantly. This means that Samsung now needs to pay huge interest as a down payment for its cash flow, and is likely to incur losses this fiscal year. One of its strategies to reduce debt is to sell assets. Samsung's construction business has been sold to Volvo, and its forklift business has been sold to a US company. (24) General Motors will acquire a 35% stake in Daewoo Corporation. ANZ Bank and other companies in Australia are also looking for bargains in this field. (26)

In the most severely affected Asian countries, ownership of most production capacity may change. The private sector of these countries, including banks, has been burdened with heavy foreign currency debt. But regardless of the outcome, no matter how many bankruptcies and asset sales occur, factories, machines, public and private infrastructure will still exist. Foreign companies have been selecting undervalued assets. In most affected economies, it is likely that one day when we look back, we will find that the main lasting impact of the 1997 crisis was a change in ownership - especially an increase in foreign ownership of productive assets in Asian countries.