Why It Matters

Correction or crisis?

To many, the turbulence in global financial markets may feel like the inception of a crisis. While parallels exist, a 1997-style Asian financial crisis is not likely as the region's economies are in much better shape to weather volatility today.

The 1997 crisis was about indefensible currency pegs to the United States dollar, inadequate foreign exchange reserves, and heavy exposure to hot money inflows. Today, currency pegs have largely been replaced by floating rates, while foreign exchange reserves and current account balances are more robust. Major Asian economies are generally stronger - Standard & Poor's rates nine of 10 major Asian economies investment grade. In late 1997, only six were rated investment grade.

Many Asian nations' external debt as a percentage of economic output has generally declined since 1997. Their current account, or trade, balances are mostly better. Only Indonesia and India face deficits today - down from seven countries in 1997.

Despite the huge global sell-off on Black Monday, as the Straits Times Index (STI) dived 4.3 per cent on the back of Shanghai's 8.5 per cent plunge, many say this is far from a repeat of the global financial crisis. Back then, the STI plunged 8.3 per cent on

Oct 24, 2008, while Wall Street posted a one-day drop of 7.9 per cent on Oct 15, 2008.

The volatility in stock markets this week stems from uncertainty over China's economic health and its implications for global growth, rather than from systemic risks such as a looming bank collapse.

No doubt risks are rising, as a weaker yuan adds to the US-dollar debt burden for Chinese firms and Asian economies' dependence on a slowing China is a vulnerability that cannot be ignored.

But the world's No. 2 economy is in better health than perceived, even as a growing number of economists challenge China's claims of 7 per cent second-quarter growth.

So while more roller-coaster days are expected in the coming weeks, investors should not mistake a correction for a crisis, and miss an investment opportunity. But don't bet all your life savings on it.

A version of this article appeared in the print edition of The Straits Times on August 28, 2015, with the headline 'Correction or crisis?'. Print Edition | Subscribe