On the surface, conditions seem ripe for a repeat of the sell-off two decades ago. But there are some big differences between then and what we are witnessing today
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A financial contagion from Wall Street spreads across the Pacific to hammer Asian markets. Regional stocks plummet from Shanghai to Singapore. Hong Kong’s Hang Seng Index takes one brutal daily beating after another, amid talk of an overdue “correction”. That was pretty much the story I wrote for The Washington Post in October of 1997, when the New York Stock Exchange plunged more than 7 per cent and trading was briefly suspended. But the essential elements would read pretty much the same for what we saw happening this past week.
Regional stocks once again seem in free-fall. And, on the surface, the culprit once again is New York, and the bad news from Wall Street which invariably infects Asian market confidence. Then, like now, there were concerns about overvalued markets and “bubble” economies – the housing bubble, the debt bubble, the dot-com bubble.
But there are big differences between the big October 1997 sell-off and what we may be witnessing today.
The 1997 collapse was precipitated by a full-blown regional economic crisis that began with the collapse of the Thai baht at the beginning of July in 1997. Thailand, South Korea and Indonesia all saw their currencies collapse against the dollar, sparking a wave of corporate bankruptcies and unemployment spiralling overnight. Wall Street was initially immune to the problems across the Pacific, but investors eventually became spooked.
The currency crisis exposed how the East Asian “tiger” economies had actually been zooming along on borrowed money and piles of bad debt. Largely unregulated banks were making shoddy loans to all kinds of shady customers, like the convicted swindler known as “the Biscuit King” in Thailand who got a series of questionable loans from the Bangkok Bank of Commerce. Ordinary people were buying and selling new condos like it was the back room of a Macau casino.
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The decade-long “Asian economic miracle” – the double-digit growth rates of the 1980s and early 1990s – was actually more like a mirage.
That crisis 21 years ago started in Asia and spread to the US. This time, it seems, it’s the other way around. In Asia, the fundamentals are far stronger – and it is uncertainty in America that is infecting Asian markets.
The Asian countries largely learned their lesson from the 1997 crisis. They cleaned up their banking system – scores of banks with too many bad loans were forced to close down. Regulatory oversight was improved. More importantly, Asian countries that saw their currencies ravaged by speculators learned a lesson about stockpiling foreign exchange to prevent speculative attacks. They began amassing US dollar holdings.
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Now it’s the Asian countries that can lecture the US about the dangers of fiscal profligacy.
At the start of the weekend, as markets were tanking, Congress was voting for a new spending package of US$560 billion to increase defence spending, renew some health programmes and extend expiring tax breaks. The new package, on top of last year’s US$1.5 trillion tax package and President Donald Trump’s proposed US$1.5 trillion infrastructure plan, could mean the US is looking at running US$2 trillion annual budget deficits.
And this from the Republican Party that pledged to bring fiscal sanity to Washington. These would be the same Republicans who warned the country was about to fall off a fiscal cliff when Barack Obama won approval to spend US$787 billion on an economic stimulus package in 2009 to pull America out of the Great Recession.
If global markets are spooked by the looming pile of red ink, they ought to be.
There are also good signs from the US – wages rising, corporate profits up, unemployment hitting new lows. But in a reverse irony, good news means the Federal Reserve may raise interest rates to counter inflation.
As the markets continue their volatile up-and-down slide – and at the moment, mostly sliding down – we need to recall one other lesson from the past. Two years after the 1997 collapse, all the regional stock markets were hitting new highs. Hong Kong was up 40 per cent, Indonesia was up 64 per cent and South Korea was up 75 per cent. In fact, the financial markets were doing so well in 1999 that the warning then was that the countries would start becoming too complacent.
So don’t panic. Markets may be overdue for a correction. Investors may be in for a wild ride. But countries should emerge from the carnage even stronger. That happened in Asia after 1997. Let’s hope America can follow suit. ■