Asia's current financial landscape bears a striking resemblance to the eve of the 1997 financial crisis, with elevated US Treasury yields, a weak yen, and rampant tech optimism all present. However, HSBC's chief economist cautions that the true epicenter of risk has shifted this time around.

In a research note dated August 31, HSBC Chief Economist Frederick Neumann argued that while the present macro environment shares notable parallels with the period preceding the 1997 Asian financial crisis, the core risk now facing Asia has evolved from "financial fragility" to "demand fragility." He warned that economies such as South Korea, Japan, and Singapore have become heavily reliant on American demand for AI hardware, which now constitutes the region's most significant vulnerability.

Unlike in 1997, when many Asian economies were net capital importers heavily dependent on external financing, most in the region have now transformed into net capital exporters. This shift has substantially reduced their dependence on outside funding. But this does not mean the region can rest easy. If rising US Treasury yields dampen enthusiasm for AI hardware investment, or if yen volatility disrupts global funding markets, Asia's export demand could face serious pressure, potentially stalling regional economic growth.

Parallels with 1997

Neumann highlighted three notable similarities between the current environment and the period leading up to the 1997 crisis.

First, on US Treasury yields: before the 1997 crisis, the yield on the 10-year US Treasury climbed from 5% in October 1993 to roughly 8% by November 1994, and remained near 7% as late as April 1997, about 200 basis points higher than four years earlier. In this cycle, the 10-year yield has risen from a record low of 0.5% in August 2020 to around 4.79% as of Tuesday morning, after climbing roughly 80 basis points from February's 3.9%, according to Neumann.

Second, on the yen: in April 1995, the currency hovered around 80 per dollar, its cyclical low, before depreciating about 55% to 130 by April 1997. In the current cycle, the yen has fallen roughly 57% from its 2021 low near 103, touched a high of 163 per dollar in July, and has since pulled back to around 160 following coordinated intervention by US and Japanese authorities.

Third, on technological optimism: the internet boom gripped global markets ahead of the 1997 crisis. Today, the AI frenzy is playing a comparable role, fueling sustained investor enthusiasm.

A Key Divergence: Asia's Capital Position

Despite these surface-level similarities, Neumann emphasized that the differences between now and 1997 outweigh the parallels.

In the 1990s, most Asian economies were net importers of capital. Domestic savings were insufficient to fund spending, leaving the region heavily reliant on external financing. Consequently, rising dollar funding costs and yen volatility were the primary catalysts for regional financial stress at the time.

Today, Asian economies have largely become net capital exporters, meaning higher dollar funding costs and a weaker yen no longer constitute major pressure points. Neumann noted this structural shift implies that the transmission chain of 1997, marked by currency collapses, capital outflows, and banking crises, does not have the same conditions to materialize today.

The New Risk: AI Demand Is the Storm's Eye

Still, Neumann stressed that Asia is not without weaknesses, only that the vulnerable points have migrated.

Growth engines across several key Asian economies are now deeply tied to the surge in US AI hardware demand. Electronics exports from South Korea, Japan, and Singapore now depend significantly on sustained AI-related demand.

"Unlike the financial fragility of the 1990s, Asia now faces demand fragility," Neumann wrote. He cautioned that if persistently elevated US Treasury yields and higher funding costs cool the AI hardware investment boom, or if sharp yen swings destabilize global funding markets, Asia's export demand could contract abruptly, draining regional growth momentum.

That assessment implies that for investors allocating to Asian assets today, the critical variable to monitor is no longer exchange rates or capital flows, but rather the durability of the US AI investment cycle.