By George Magnus
Financial instability in Asia and elsewhere has been attributed, partly, to China following the mishandling of a mini-devaluation of the yuan in early August and a failed attempt to prop up the flailing equity market. Yet the prevalent thinking now is that these developments reflect not only a structural slowdown in China’s economy but also some confusion — perhaps even dissent — among Chinese policymakers. This is fueling expectations that this story has a long way to go, even though markets seem to have quietened down for the moment.
Taking into account some uncertainty about the U.S. Federal Reserve’s meeting set for Sept. 16 and 17, where a decision to raise interest rates for the first time in a decade may be announced, it is possible to understand why some are asking if another Asian crisis is brewing.
The immediate answer is no, largely because some factors that helped to trigger the 1997-98 crisis are not present this time. Levels and ratios of external and fiscal debt among Asian countries are not as high as they were in 1997, foreign exchange reserves are markedly higher, and no one is trying to defend overvalued pegged exchange rates to help insulate corporations from the folly of bloated foreign currency borrowings.
This does not mean that everything is different or better. Now, as then, the Japanese yen has fallen sharply against the dollar — by 20% since last year and 60% since 2012. Now as then, Chinese devaluation is a significant factor. So far, the devaluation of the yuan against the U.S. dollar has been restricted to a modest 3%, but many forecasters think it will continue to be guided lower, perhaps by a further 6% to 7% by the end of 2015 or early 2016. That still looks small compared with events three years before the Asian crisis, when the official rate for the yuan was devalued by 50%. But the effective devaluation then was just under than 8%, given that most trade transactions did not take place at the official rate.
Now, as then, people are fretting initially about a Southeast Asian country, without being able to see how contagion could be unleashed. In 1997 the focus was on Thailand; this time it is on Malaysia, where the ringgit, the local currency, has fallen to a record low of 4.20 against the dollar, a drop of 15% this year and 40% since the middle of 2013. Malaysia’s problems span high levels of U.S. dollar debt, its status as a net oil exporter and a deepening political crisis for Prime Minister Najib Razak, whose resignation is demanded by protesters amid broadening allegations of corruption.
Malaysia may be a special case, but other countries are certainly feeling the raw end of the economic stress that has been accumulating since 2011, and is manifest in slowing economic growth and faltering exports. While this is not news, and has been flagged by the International Monetary Fund and other international bodies for some time, the pressures are beginning to become more acute for a very important reason.