Will a 1997-style Crisis Recur? Global Bank Issues Warning Highlighting Three Similarities
The 1997 Asian financial crisis, which resulted in a widespread regional economic recession, has become a significant concern in the current climate of market instability, characterised by currency collapses, capital flight, and banking failures.
Frederick Neumann, chief economist at HSBC, stated that similarities between the present situation and the period immediately preceding the 1997 crisis are already becoming apparent. He detailed these observations in a note dated 31 August.
Three Similarities
Quoting CNBC International, Neumann highlighted several key aspects. First, there is the high yield of US Treasury bonds. He noted this is the most prominent similarity to the moments before the 1t997 crisis. During that period, the 10-year US benchmark bond yield rose from 5% in October 1993 to approximately 8% in November 1994. By April 1997, yields were around 7%, roughly 200 basis points higher than four years prior. Notably, as of Tuesday morning, the 10-year Treasury yield has risen from a low of 0.5% in August 2020 to approximately 4.79%.
“Indeed, that process took six years,” he remarked. “However, this year alone, yields have surged by about 80 basis points from the 3.9% recorded in February,” he emphasised.
Furthermore, the US Treasury has announced plans to target the 10-to-30-year bond market segment for buyback operations, intending to at least double the maximum size of these operations from US$2 billion to at least US$4 billion.
Secondly, another similarity is evident in the recent movement of the Japanese yen. In April 1995, the yen traded at a cyclical low of 80 against the US dollar, whereas by April 1997, it had weakened to 130, a depreciation of about 55%. Currently, the yen has weakened by 57% from its low of approximately 103 in January 2021 to a peak of 163 in July, before rare joint interventions from Washington and Tokyo strengthened the currency to its current level of around 160. Markets are now considering the possibility of further interventions.
Thirdly, leading up to the 1997 crisis, the market was gripped by optimism regarding technology following the emergence of the internet. In a contemporary context, Neumann noted that the surge in Artificial Intelligence (AI) is triggering similar levels of optimism.
Are There Differences?
Despite these similarities, Neumann argued that the differences between 1997 and 2026 are greater than the similarities. Most significantly, he noted that during the 1990s, most Asian economies were capital importers, meaning they received more foreign investment than they invested abroad, and possessed insufficient savings to meet their expenditure commitments. Rising US dollar funding costs and an unstable yen—which caused investor anxiety—were the primary catalysts for pressure in the region.
In contrast, Asian economies are currently capital exporters. Consequently, high US funding costs and a weakening yen are not the primary drivers of pressure. However, this does not mean the region is immune to negative impacts. The most relevant issue for Asia, Neumann asserted, is its dependence on the surge in AI hardware in the US, which drives many economies in the region.
“Exports of electronics related to the AI boom have supported growth in South Korea, Japan, Taiwan, and Singapore,” he noted. “Rather than financial vulnerability as seen in the 1990s, Asia now faces demand-side vulnerability.”
He warned, “If rising bond yields and US funding costs hinder the AI hardware boom, or if the yen destabilises global funding markets, demand for the region’s products could plummet, and economic growth could slow drastically.”