This year not only marks the 20th anniversary of Hong Kong’s handover from Britain to China, it is also the 20th year since the Asian financial crisis in 1997. Back then, the Hong Kong dollar peg was severely attacked, leading to a six-year recession and a sharp deflation of asset prices. Now the US has started to raise rates, coupled with an unprecedented attempt to shrink its balance sheet. We can’t help but think: will there be another financial crisis?
The Asian financial crisis started with the Thai baht being targeted by speculators. The Thai government then scrapped the baht’s peg to the greenback. The devaluation unleashed a wave of speculative attacks on other regional currencies including the Indonesian rupiah, South Korean won and Malaysian ringgit. the Hong Kong dollar peg was targeted in August 1998, and although the government defended the peg, it came with a serious dip in the economy, which did not bottom out until 2003.
The West has a rather simple interpretation of the crisis, claiming that corrupt governments and over-spending by enterprises were to blame. In my opinion, the over-reliance on dollar lending of companies and governments was the real culprit. When the US Federal Reserve started to raise interest rates, large capital flows to the US occurred, which worsened the situation of countries with insufficient reserves to support the peg.
Furthermore, Hong Kong’s handover to China in 1997, signaling the end of 150 years of British colonial rule, was another important factor driving the crisis. The handover marked a complete change in the western perceptions toward China and Asia. The West did not welcome — and feared — China’s rising power. I suspect that the Asian financial crisis was deliberately brought on by western powers.
Now the US has plans to hike rates and trim the balance sheet. Will history repeat itself?
There is no definite answer but the possibility of another financial crisis due to a US rate hike is much lower than before. China’s GDP has grown more than 10 times in the past 20 years. Most of the Asian currencies have been floated except the Hong Kong dollar, and the foreign exchange reserves of Asian countries have multiplied, while dollar lending has been drastically reduced. The possibility of another economic crisis led by capital outflow would be low.
That said, there are still problems. China’s debt has reached 260 percent of GDP, while governments worldwide have been relying on the ultra-low interest rate environment. If the Fed speeds up the pace of rate hikes and its balance sheet reduction lifts long-term bond yields, trillions of US dollars worldwide will flow to the US.
Will the US deliberately tighten monetary policy, as conspiracy theories suggest, in order to trigger China’s potential debt crisis? It is not impossible, but it would harm China without benefiting the US.
For now, the biggest risk in the market is that foreign capitals are becoming outspoken about their optimistic tone toward the China market, whether intentionally or not, luring more funds into China and Hong Kong stocks. As the over-excitement grows, the market bubble will burst at some point.
I would rather see more “bad news” in the near future. For instance, China-US relationship getting worse, intensifying wrangling over North Korea, or even China allowing failing behemoths to go bankrupt. The shock waves will slow the bull market in long term.
This article appeared in the Hong Kong Economic Journal on July 25
Translation by Ben Ng
[Chinese version 中文版]
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