HSBC's chief economist points to rising US Treasury yields, a weakening Japanese yen, and surging tech optimism as conditions that bear a striking resemblance to the market environment just before the 1997 Asian financial crisis. Neumann notes that the primary risk has shifted from financial contagion to a potential downturn in US AI demand, given that Asian electronics exports are now heavily reliant on that sector. He does, however, acknowledge that Asian economies today are far better equipped to withstand shocks, having transformed from the capital-importing nations of the 1990s into net capital exporters.

The catalyst for the current concern mirrors the past: the crisis of 1997, which plunged much of the Asia-Pacific into recession, was marked by currency collapses, capital flight, and widespread bank failures. It began with a sharp downturn in the Hong Kong stock market, much like the volatility seen in global markets today. HSBC's chief economist, Frederic Neumann, argues that the current financial landscape in Asia shares several "remarkable similarities" with the period preceding that historic crash.

In a research note published on August 31st, Neumann highlighted three key parallels: the significant surge in US Treasury yields, the persistent weakness of the Japanese yen, and the prevailing enthusiasm for the technology sector. He identifies the rise in US bond yields as the most critical point of comparison. For example, the 10-year US Treasury yield climbed from 5% in October 1993 to about 8% by November 1994, and it remained near 7% as late as April 1997—roughly 200 basis points higher than four years prior.

Drawing a line to the present, the 10-year yield has risen from a low of 0.5% in August 2020 to approximately 4.79% in early trading this Tuesday. Neumann concedes that this current cycle has been longer, noting, "This time, the rise has taken six years, but the jump of about 80 basis points just this year, from 3.9% in February, is notable." Interestingly, the US Treasury announced last month plans to increase its buyback operations for 10- to 30-year bonds, at least doubling the cap from $2 billion to $4 billion. The 10-year yield was recently quoted at 4.772%, up 0.014.

Another parallel lies in the yen's trajectory. In April 1995, the yen hit a cyclical low of 80 against the dollar but depreciated to 130 by April 1997—a cumulative decline of about 55%. Today, the yen has weakened from around 103 in January 2021 to hit 163 in July, before a rare joint US-Japan intervention pulled it back to near 160. Markets are now closely watching for potential further intervention. The dollar-yen rate stood at 160.02, up 0.18%.

Just as the dawn of the internet fueled a tech frenzy before 1997, Neumann argues that the current AI boom is generating a similar wave of optimism. However, he believes the differences between 2026 and 1997 are more significant than the similarities. The most crucial distinction: in the 1990s, most Asian economies were capital importers, reliant on overseas investment to cover domestic spending shortfalls. This made them vulnerable to the higher dollar funding costs and yen volatility that triggered the crisis.

Today, the tables have turned. Asian economies are now capital exporters, making them less directly vulnerable to US funding cost increases or yen depreciation. But this doesn't mean the region is safe. Neumann identifies the most prominent risk as the heavy reliance on the US AI hardware boom, which is a key growth driver for many Asian nations. He specifically mentions that South Korea, Japan, Taiwan, and Singapore all benefit from exports of AI-related electronics. "Instead of the financial fragility of the 1990s, Asia now faces demand-side fragility," Neumann concludes, warning that if higher US yields and tighter funding conditions cool the AI hardware sector, or if yen fluctuations disturb global financing markets, external demand for Asia could weaken and stall economic growth.