1 overseas creditors 海外债权人
2 international capital flows 国际资本流动
3 short-term capital 短期资本
4 herd behavior 群体恐慌行为
The crisis became evident in July, 1997. Overseas creditors began withdrawing short-term capital from the region, placing intense pressure on the exchange rates for the currencies of Thailand, Indonesia, Malaysia, the Philippines and South Korea.
These five countries had been heavily dependent on international capital flows. In 1996, there was an inflow of $US 93 billion. But a year later the flow was reversed. In 1997 there was an outflow of $12 billion.
As capital was withdrawn from the region and the exchange rates of the five countries depreciated, or fell, panic set in amongst foreign creditors.
The result was a deepening spiral. As capital was withdrawn, the exchange rate depreciated, leading to more capital outflows.
Economists call these panics 'herd behaviour'; where the creditors in a market all rush, or stampede, for the exit, trying to get out first.
Usually, their behaviour is not based on the real underlying economic conditions in the market (the fundamentals), but rather on the behaviour and expected behaviour of other creditors.
If financial panics are not new, the Asian crisis came as a complete surprise to virtually all commentators. After all, the five Asian countries had shown remarkable growth in output, employment, productivity and exports over the past 20 years.
Warning signs became apparent from 1996, as these countries faced increased competition from China and Mexico in markets for manufacturing exports. Growth rates began to slow. But the real problem lay in their reliance on short-term capital flows from overseas. This capital can be moved quite quickly in and out of an economy. Economists call such flows 'indirect foreign investment' to distinguish them from longer term or 'direct foreign investment'.
While the five countries had deregulated their financial systems, increasing the number of banks and the ease of foreign borrowing, there was inadequate regulation and supervision of financial institutions. Indeed, in some cases, banks were allowed to break regulations on lending. The degree of risk in borrowing was seriously underestimated. Their exchange rates were also mildly overvalued as they targeted the US dollar.
These policy errors contributed to produce a fragile financial system - one which was vulnerable to a rapid reversal of capital flows. Nevertheless, the magnitude of the 1997 panic cannot be explained by the extent of the policy errors. Foreign creditors had a superficial understanding of the long-term prospects of the region, which meant that their behaviour was subject to wild swings.