Is A Replay Of The 1997 Asian Financial Crisis Coming?

Back in 1997, waves of currency speculators descended on the Thai baht. After many years of having a currency peg, it was unclear if Thailand could continue supporting the value of the Thai baht against the US dollar.

The Thai government had sworn to protect the currency peg. But, after months of defending the baht, the Thai government finally gave up and was forced to float the baht, leading to a massive devaluation of the currency. The sudden devaluation caused panic in the market and the crisis spread to most of Thailand’s neighbouring countries.

Ultimately, the region went through one of its worst economic times in what is now known as the Asian Financial Crisis. Singapore was also affected to a certain extent and stocks here suffered badly, with the Straits Times Index (SGX: ^STI) falling by over 60% from the start of 1997 to its crisis-low in 1998.

Currently, after seeing many Asian currencies depreciating against the US dollar over the past few months, currency speculators appear to be turning up the heat on one major Asian currency: The Hong Kong dollar.

The Hong Kong dollar has been pegged to the US dollar for the past 32-years. But, there seems to be a mismatch given that the city’s economy is more closely linked to that of China.

Speculators are currently betting that the Hong Kong dollar will remove its peg with the US dollar and depreciate together with the Chinese yuan. Call it déjà vu, but in a similar manner to the Thai government nearly 20 years ago, the Hong Kong Monetary Authority had recently vowed that it will defend the city’s three-decade-long peg to the US dollar with its HK$3.3 trillion war chest.

So what will happen from here on out?

Will the Hong Kong Monetary Authority be successful in defending the Hong Kong dollar? But even if it is successful over the short-term, the city’s economy is still closely linked to China (as already mentioned), yet has a currency that is fixed to the US dollar. That is a problem. Would it not be better if the Hong Kong dollar is more closely linked to the Chinese yuan instead?

Or, will speculators have the last laugh? In this case, if the Hong Kong dollar removes its peg to the US dollar, will the devaluation spread to other regional currencies as it did in 1997 with Thailand?

How will each scenario impact our investments? Will it fundamentally change your investing thesis for certain companies? Will 2016 be a repeat of 1997?

These are all possible scenarios investors may need to think about.

If you'd like more investing insights as well as the latest news about Singapore's stock market, you can get both from The Motley Fool's free weekly investing newsletter, Take Stock Singapore. Written by David Kuo, Take Stock Singapore can help you grow your wealth in the years ahead. So, come sign up here!

The Motley Fool's purpose is to help the world invest, better. Like us on Facebook to follow our latest news and articles.

The information provided is for general information purposes only and is not intended to be personalised investment or financial advice. Motley Fool Singapore writer Stanley Lim doesn't own shares in any companies mentioned.