What caused the Asian Financial Crisis of 1997?

One of the biggest reasons for Asia’s financial crisis was the surge in capital inflows. It was the primary aspect that created panic within the entire Asia. This panic further led many investors to pull out their money, which resulted in a financial crisis.

The two of the robust currencies of Asia, including the Japanese ‘yen’ and the Chinese ‘renminbi’, was devalued to a large extent. This affected the export revenues immensely and brought crisis into Asia. (See Why do countries devalue their currency?)

Asia’s financial system was not much organized or systematic as they were prone to the financial crisis. The biggest weakness of their economic systems was that they did not include any incentives for effective risk management.

Many investors started assessing the financial systems in Thailand just after they realized and witnessed the collapse of the Thailand currency ‘baht’.

Semiconductors’ prices slump adversely affected export revenues. It was because Asia was extensively dependent on the export of semiconductors.

The inefficient utilization of capital inflows was one of the predominant reasons that caused the financial crisis in Asia. This inefficient usage led to an increase in the number of current account defects. It impacted on the well-being of Asia’s economy adversely. Thus, it resulted in a crisis.

The whole of Asia experienced an abrupt economic slowdown when several Asian banks have to deal with bankruptcies of borrowers, due to which the whole of Asia undergone the disruption in cash flows.

Some countries predicted the possibility of experiencing economic weakness, but many countries ignored and underestimated the warning signs that were showing up the occurrence of this situation. (See Summary of the Syrian Crisis)

Some borrowers were immensely affected as they were misguided about the exchange rates and were given a false sense of security. Subsequently, those borrowers lost plentiful money when devaluation in Asian currencies happened.

The price of the assets was inflated to the levels that were not sustainable as the capital was effortlessly available at much lower rates than before.

Many Asian countries were not able to see the warning signs and hence, lacked knowledge about the actual state of their economy. Being unable to comprehend the current situation led to the financial crisis.