Introduction
Back in the world of the ’90s, the countries of Southeast Asia and Korea were meant to be taking over the world in the financial world. The time when there is a deep downfall in the prices of the assets, the business fails to progress, and consumers are unable to manage to deal with their debts, accounts liquidity shortage is experienced by a financial institution. They are said to be in a financial crisis. The financial crisis happens most of the time due to the panics and bank runs, people are standing outside the bank in a queue for their turn to get their assets out of the bank. Bank runs are most often faced by the healthy banks when people tend to believe that other people are going to run, they tend to believe that if they will not extract their assets from the institution, the institution will not be able to return the money later on thus they extract the money as soon as possible. The bank on the other side has to pay the assets of all the customers, they begin to take debt from others to fulfil and meet the requirements of all their customers. For example, if one of a hundred customers goes to the bank asks for the money bank can manage but if twenty of one hundred customers demand their money it becomes difficult for the bank to arrange all that money i.e. the bank will become insolvent. For, most of the banks do not have physical money in form of paper.
Before the Asian Financial Crisis began it was unknown about the financial crisis. The beginning Asian financial crisis started in Thailand when there was a devaluation of Baht. The official reported date at which the financial crisis started is reported to be the 2nd of July, 1997. Everything fell apart. This is when the Thai Cabinet decided to depreciate the Baht, the official currency unit of the Thai Government to avoid the failure of the government for performing their debt obligations. With the emergence of this Asian financial crisis, it started to spread from country to country. Such that the economic growth stopped in Malaysia and Thailand and Singapore. In early 1997 financial issues arise for both the developers and financial institutions when there was depreciation in property and stocks. This all was due to the reason that many countries that have taken loans from Western banks were unable to pay the debt when the time came. Thus leading to bankruptcy. The currencies of these countries suffer increasing damage. Unemployment, bank failures, and business enclosures became the news of daily routine. When it comes to Hong Kong who was able to continue the positive economic growth which is 5.3% in 1997, later on, Hong Kong experienced depreciation in their economic growth of 5%. However, these financial crises of the economy vary from country to country. The Hong Kong Dollar, a currency of Hong Kong is dependent on the American Dollar. This financial crisis in Thailand did not just stop there. Within the one year of the crisis, it began to exceed all reasonable expectations. Instead, it picked up the pace and started to impact the other country’s economy as well. Within days, the pressure of other countries’ currencies e.g. ringgit of Malaysia, Rupiah of Indonesia were also impacted. When this plague reached Indonesia who had a great impact on South America and Russia. To balance the fluctuations of the exchange rate the authorities of these countries joined hands with each other. But even after this act of unity the crisis lead to floating. Singapore who is known for following managed floating policies also became the victim, they led their dollar to depreciate as well. Later in 1997, this financial crisis made its way towards Taiwan, Hong Kong, South Korea, and Japan. The depreciation that happened in Taiwan had a major impact on the financial crisis of the Hong Kong dollar. There have been several attacks Hong Kong dollar but somehow they managed to overcome them without an increase in interest rates.
Causes of a financial crisis?
There can be several causes for the financial crisis. One important aspect cited above is the systematic failure which leads to bank runs, unexpected human behaviors which tends to the fact how people will react if a bank fails to meet the requirement of one user. At times it includes the contagions that spread worldwide leading to economic recessions. Thus the question arises here who to blame for the financial crisis. Is it the investor or the borrower? That can only be analyzed after the complete analysis of the financial crisis.
Example of Financial Crisis
The well-known financial crisis which is known worldwide includes the Crisis of Tulip Mania in 1637, Credit Crisis of 1772, Stock Crash of 1929, OPEC oil crisis in 1973, Asian Crisis of 1997–1998, Financial crisis globally 2007–2008.
Types of Financial Crisis
There can generally be any type of financial crisis. The types of financial crisis areas
Currency Crisis
It is the type of financial crisis, it exists mostly when the country’s central bank has enough foreign exchange to maintain the country’s exchange rate. It mostly occurs due to the attacks in foreign exchange.
Sudden Stop Crisis
It is the type of financial crisis, it mostly follows the currency crisis. The basic reason for the sudden stop is when the foreigner stop investing in the nation’s economy or the country individual stops is investing in the economy which results in the rising of prices.
Debt Crisis
Most often debt crises arise due to the unpayable state of the nation. A nation occasionally fulfils its state of running when the taxation revenues are more and government expenditure is less but if the taxation revenues are less than the government expenditure the government either increases the taxes rate or starts to take a loan from other investors in the international market. This makes the government now rely on the investors. But in case if the country’s state of paying the debt money to the international market investors, they feel vulnerable and increase the interest amount due to which the country tries to pay the debt amount as soon as possible. If a country fails to do so, it gradually meets the debt crisis.
Banking Crisis
This is also known as a systematic failure. It happens when the bank is facing both liquidity and solvency issues. The investors tend to stop believing in the bank and the bank fails to fulfil their needs.
Asset Pricing
What is Asset Pricing
It refers to the prices of financial instruments. Financial instruments refer to Bonds and Stocks. Asset pricing generally talks about the prices at the time of transaction of buyer and seller. That value is considered as asset price and it helps in dealing with various factors i.e. fundamentals, recessions, and risks.
Increase in Asset Pricing
When there is an immersive and sharp increase in the asset prices, there comes a term to refer to that which is “bubbles”. Thus the asset pricing fundamentals help in predicting the models of the financial markets. There have been many bubbles in history. Among them, the popular crashes include Tulip Mania 1637–1637, Mississippi Bubble in 1719–1720, etc.
Effect on Economy
The Asian Financial Crisis depends on these facts
Currency value compared to the United States dollar
With the effect of these two factors, the Hong Kong Housing Market became vulnerable to the Asian Financial Crisis. There could be many causes of the Asian financial Crisis but the major that is related to the Asian Financial Crisis is Financial Liberalization.
Capital Flow
Capital flow refers to the circulation of money in different operations of finance which includes, investment, trade, and business operations. It can either be done by an organization, government, or individual. Thus the amount of money invested in certain operations by the government including its research and development cost refers to the capital flow of that government.
Financial Liberalization
When the government is not allowed to participate or involve in any financial operation carried out by a financial market that is known as financial liberalization of that market. Financial Liberalization enables them to make and take policies and decisions related to finances according to their needs. No doubt in long run it may be beneficial to the financial market but if a single wrong decision is taken it can even meltdown that financial market.
Causes of Asian Financial Crisis
The Asian Financial Crisis is divided into general two categories.
Internal Factors
Poorly Regulated Financial Markets
Market status was poor as a measure of regulatory authority and management.
Constructions Project Management
People started to believe that the construction business will help them increase the economy of the country thus they started investing in the construction business. No doubt, investing in the construction project is a great way to boost the economy but the situation was unbalanced because the cost of funds was increasing exponentially but the return amount was decreasing halted. It started from taking a loan from the banks and then leaving the projects amid the completion. Thus when the projects are not completed one is not able to sell them, which results in an increase of loans and eventually in financial crisis.
Nepotism
The private sector of the nations was not at all encouraging the people on merit. Instead, they started giving licenses to those people for construction projects which are somehow related to them, which were giving them benefits somehow either directly or indirectly. The trend of providing loans provides people with great ease. Thus when they have to give the money back they pay it with less interest which results in a financial crisis.
External Factors
Pegging
All the economy worldwide was treated in terms of US dollars. The US dollars managed to retain a very good value. The value of the US dollar went on increasing which resultantly became one of the reasons for a financial crisis.
World Supply Expansion
As the reference for the economy was US dollars, different nations thought of increasing the exports. With the increase in exports the supply increases. This increase in supply decreased the value of the nation’s currency. The supply issue can be addressed if a nation increases its production rate as well as the export rate. But the issue that kept on arising is that all the neighbourly countries increased their production rate which results in such a devastating situation.
Defending Hong Kong Dollar
It was all started in the summer of 1998 when the speculative attacks were done by an American investor George Soros. Hong Kong started facing a financial crisis. Hong Kong Special Administrative Region managed to win the battle against George Soros for defending the Hang Seng Index and Hong Kong dollars. On the purpose of entering the market, on 14th August a controversial decision was made by Hong Kong Monetary Authority.
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