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How to avoid financial crisis a la Thailand 1997
By Zhang Chunyue
Updated: 2007-05-15 09:34
A decade later, Asian countries are once again prosperous, boasting strong economic development with large-scale inflows of international capital. This is especially true for China. However, the United Nations is warning that Asia is again vulnerable to financial meltdown. The dire news comes from an annual survey released by the UN's Economic and Social Commission for Asia and the Pacific in mid-April. This much is known: China's strong and stable economic performance drives regional development and lifts millions out of poverty, and attracted by its economic performance, the world has shifted its attention to China. China's markets are now targeted by enormous amounts of international hot money with expectations that its currency will appreciate further in the near future. Amid the turbulence, international speculators helped push the Chinese benchmark Shanghai Composite Index to record highs as high as 4,000 points on May 9 three times what it was two years ago. All this creates a conundrum for China: how to maintain rapid economic growth and eradicate poverty, while at the same time minimize the threat of a possible financial crisis brought about by rapid growth. The financial unrest a decade ago was triggered by Thailand's announcement that it would drop its fixed exchange rate and let the currency float starting July 2, 1997. The decision led to a sharp depreciation in the Thai baht. A depreciation epidemic soon plagued all of East Asia, with Thailand, Indonesia, South Korea hit hardest. Amid expectations at the time that China would be forced to devalue its currency to guarantee export competitiveness, China held firm, pegging the yuan to the US dollar. The yuan's non-convertibility protected its value from speculators. The current situation is very different from that of 1997. This time, it is China that has adopted a managed floating exchange rate, and the yuan has already appreciated 5.4 percent since 2005. Judging by lessons drawn from 10 years ago, a financial crisis tends to occur after years of high GDP growth. The 1997 Asian crisis followed years of East Asian countries' rapid development. The economies of Thailand, Malaysia, Indonesia, the Philippines, Singapore and South Korea experienced GDP growth rates of 8-to-12 percent in the late 1980s and early 1990s. Similarly, China's GDP keeps growing fast. The annual growth rate has exceeded 10 percent since 2004. The average growth rate from 1979 to 2004 was 9.6 percent. First quarter GDP growth this year climbed 11.1 percent. (For more biz stories, please visit Industries)
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With China's hot economy and even hotter stock market, it's a bit of a chill to remember that we're approaching the 10th anniversary of the Asian financial crisis. The 1997 chain reaction shook the very foundations of the regional economy.