This is strikingly similar to the eve of the 1997 financial crisis! HSBC warns: This time, the eye of the storm in Asia isn't in the foreign exchange market, but in AI.

The current Asian financial environment is strikingly similar to that on the eve of the 1997 crisis—high US Treasury yields, a weak yen, and widespread optimism in the technology sector—but HSBC’s chief economist warns that the real threat has quietly shifted this time.

In a research report dated August 31, HSBC Chief Economist Frederick Neumann pointed out that although the current macroeconomic environment shares many similarities with the period before the 1997 Asian financial crisis, the core risk facing Asia this time has evolved from "financial vulnerability" to "demand vulnerability." He warned that the high dependence of economies such as South Korea, Japan, and Singapore on demand for US AI hardware is becoming the biggest hidden danger hanging over Asia.

Unlike in 1997, most Asian economies have now shifted from net capital inflows to net capital outflows, significantly reducing their dependence on external financing. However, this does not mean the region can rest easy— if rising US Treasury yields continue to dampen investment in AI hardware, or if yen volatility impacts global financing markets, Asia's export demand will face significant pressure, and economic growth may subsequently stall.

Similarities: High bond yields, a weak yen, and a tech boom

In his report, Neumann listed three commonalities between the current environment and the period leading up to the 1997 crisis.

Regarding US Treasury yields, prior to the 1997 crisis, the yield on the 10-year US Treasury note climbed from 5% in October 1993 to approximately 8% in November 1994, and even remained around 7% in April 1997, about 200 basis points higher than four years prior. In the current cycle, the 10-year US Treasury yield has risen from a record low of 0.5% in August 2020 to approximately 4.79% this Tuesday morning. "So far this year alone, yields have jumped about 80 basis points from 3.9% in February," Neumann wrote.

Regarding the Japanese yen, it hit a cyclical low of 80 per US dollar in April 1995, and by April 1997 it had depreciated by about 55% to 130. Currently, the yen has depreciated by about 57% since its low of around 103 in January 2021, reaching a high of 163 in July. It subsequently recovered somewhat under joint intervention from the US and Japan, and is currently hovering around 160.

Regarding optimism in the technology sector, the internet wave swept global markets before the 1997 crisis; now, the AI craze is playing a similar role, driving continued high investor sentiment.

Key difference: Asia is no longer a "capital-hungry" country.

Despite the superficial similarities, Neumann made it clear that the differences between the present and 1997 "outweigh the similarities."

In the 1990s, most Asian economies were net capital importers, with insufficient domestic savings to support their spending needs, making them highly dependent on external financing. Consequently, rising dollar financing costs and yen volatility became key catalysts that triggered regional financial pressures at the time.

Today, Asian economies have generally become net capital exporters, and rising dollar financing costs and a weakening yen are no longer major sources of pressure. Neumann points out that this structural shift means that the transmission chain of currency collapse, capital flight, and banking system crisis of the past cannot be replicated in the present.

New risk: The eye of the storm is the decline in AI demand.

However, Neumann emphasized that Asia is not without its vulnerabilities; they have simply shifted.

Currently, the growth engines of many major Asian economies are deeply tied to the explosive growth in demand for AI hardware in the United States. The electronics exports of South Korea, Japan, and Singapore already rely to a considerable extent on the continued pull of AI-related demand.

"Unlike the financial vulnerabilities of the 1990s, Asia now faces demand vulnerabilities," Neumann wrote. He warned that if rising US Treasury yields and financing costs cool the AI hardware investment boom, or if sharp fluctuations in the yen destabilize global financing markets, Asian export demand risks a sudden contraction, and regional economic growth momentum will also fade.

This assessment implies that for investors currently investing in Asian assets, the real variable to watch is no longer exchange rates and capital flows, but rather the sustainability of the US AI investment cycle.

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