Anniversary Of Asia Crisis Puts Recovery In Spotlight

China is now the world's fastest growing major economy, a nation so vast that it needs to create 25 million jobs a year - the equivalent of the entire British workforce. Its insatiable thirst for raw materials has sent commodity prices to all-time highs and its balance of trade surplus with America has seen the dollar plummet to quarter-century lows. Yet while the Chinese boom may not be an unalloyed economic good, fears about what might happen if it stumbles are much more acute. What, many in the markets worry, would happen if there was another East Asian crisis?

A new study by economists at the American Express Bank gives some cause for comfort, based on their analysis of the previous East Asian crisis, exactly a decade ago.

John Calverly, the chief economist and Strategist, and Kevin Grice, the senior economist, argue that the last Asia crisis was "very much a private sector boom-bust crisis, rather than a government fiscal crisis", but that "companies and banks have transformed themselves in the intervening years. Leverage has been reduced, especially short-term foreign borrowings, lending is much more cautious and business investment is at healthier levels, down from the boom conditions of the early 1990s."

Even so, as the study says, the previous bull market in Asian stocks turned to meltdown very rapidly, and from comparatively trivial origins. Ten years ago today, on 2 July 1997, Thailand was forced to devalue the baht when the central bank ran out of foreign exchange reserves. It was the trigger for the greatest financial crisis and economic collapse to hit East Asia since the Second World War. It brought meltdown to Thailand, Indonesia, South Korea, Malaysia, the Philippines, Singapore, Hong Kong and Taiwan. Further crises in South America and Russia followed and the shock also sharply reduced the price of oil, which reached a low of $8 (Ј4) a barrel at the end of 1998.

Then, as now, there was a long regional economic boom powered by exports and investment. Thailand's GDP growth averaged 10 per cent from 1987-95 and real estate prices and stock mar-kets rose strongly. But when the investment boom slowed in 1996-7, balance- sheet weaknesses in the private sector were exposed - especially excessive short-term foreign currency borrowing by banks and companies.

The weaknesses created a vulnerability to sudden investor sentiment changes, capital outflows, and devaluation. Within a few weeks, some of South Korea's largest corporations, names such as Sam-sung and Hyundai, were caught up in the crisis. It culminated in intervention by the IMF in several economies, with results that are still controversial - the "IMF Crisis"