Recently I have been reading about the 1997 Asian Financial Crisis, IMF bailout and the repercussions of the crisis. The more I read, the more I am struck with the similarities between the 1997 crisis and the current economic situation of China. After all, the symptoms are almost the same:
- Sharp stock market fall. The Shanghai Index of China’s stock market plunged from 6,000 points to approximately 2300 in less a year. The stock market in crisis-affected countries also fell sharply in 1997, only with a much deep dive.
- The government began to implement stringent money policies and credit control. In 1997, IMF recommended the crisis-torn countries like Indonesia to implement the same policy for the reason of macroeconomic restructuring.
- The export-oriented industries are having a hard time for it’s now harder to get bank loans to keep the business going. The same happened in Indonesia.
- High inflation and the sharp rise in the prices of food, energy and the general cost of living. This too happened in 1997, and the lack of food partially caused the riot in Indonesia in 1998, thanks to the suggestions of IMF and U.S. to relax food price control.
- Sharp fall of real estate prices. Shenzhen is a typical example, and the value of the new houses sometimes shrank by 30%. It is harder to sell houses and the real estate market is taking a downturn. The same happened in Hong Kong ten years ago.
The only difference I noticed between the ten-year-apart two situations is: right now, RMB (Chinese Yuan) appears to be appreciating in value against U.S. dollars, while ten years ago, the currencies of the crisis affected countries devalued a plenty against U.S dollars. But the appreciation of RMB is merely an illusion, and the currency is actually depreciating in my opinion. Inflation means the devaluation of the currency, and the mirage of a strong RMB is created by the very weak dollar.
So I would say in all the six aspects mentioned above, the history is indeed repeating the pattern of ten years before, fortunately, only by a smaller scale and a moderate pace.