The recent slump of Vietnam's stock, property and currency markets has caused tension among investors across Asia who still have a fresh memory of the 1997-98 financial crisis.
Though Hanoi moved quickly and "granted" its foreign exchange center a three-day holiday, it hasn't calmed market fears which actually are spreading to neighbors. And clearly, measures that Vietnam has taken may not work since it ignores deviations in its own economic structure.
On July, 2, 1997, the depreciation of Thai baht triggered a regional financial crisis that swept most of Southeast Asian markets and caused serious economic damage to countries in this area. From then on, Southeast Asia's financial market has been very sensitive, worrying if the crisis may recur.
To recall the crisis, it was indeed a crisis of credit and macro-economy that was caused by cheaper currencies rather than a simple money crisis. The crisis itself was a product of Southeast Asia's fragile economic structure that was caused by foreign investment-biased structures in both the systems of investment and in export, finance and banks' credit assets.
In the context of globalization, foreign investment and export it generated are the main driving forces for Southeast Asia's economic boom and may be taken as the pivot of "East Asia Miracle".
As a newly rising economy, Southeast Asia didn't absorb production factors like techs and management and combine them with local elements, and as a result, it didn't take the opportunities provided by foreign capital to form their own backbones of industry and productive forces as well as sustainable economic growth. Every time the economy of this area takes a great leap, there looms a deep recession.
The 1997-98 crisis epitomized such structural fragility. Foreign capital-led growth of investment and exports brought this area great trade surplus and foreign exchange reserves, pushed forward internal consumption and economic growth. However, in the meantime when Southeast Asia had not formed its own industrial structure, the local consumption frenzy paved the way for those foreign capital to enter local financial systems and real estate that were immature.
Therefore, the local economy started to form a bubble and governments were forced to raise rates and appreciate their currencies which inevitably attracted more credit fund from western banks. So the structures of local banks' assets were all foreign capital-oriented.
When the macroeconomic foundation is good, foreign money flows consistently and helps the local economy move forward. But once it engaged in adjustment, a rapid withdrawal of foreign capital caused sharp shortage of market liquidity. And the slump in all markets of stock, property and currency exacerbated the recession into a foreign capital-led financial crisis.
Obviously, foreign capital and the performance and policies of local macro-economics involved mutual affects along with this process. On the one hand, foreign capital injects the main force to drive the economy; on the other hand, it adds an incremental as it depends too much on performance and policy-adjustment of the latter.
