Integration of Internal and External Causes of

Economy of Asia Economic Crisis

The impact of this financial crisis is extremely profound, as it fully exposed the deep-seated
problems of the rapid economic development of Southeast Asian countries in the 1990s. But
from a development perspective, this economic crisis also has a certain positive significance:
Asian developing countries have had a strong driving force in deepening financial reforms,
adjusting industrial structures, and improving supervision systems.

Objectively speaking, the economic crisis in Southeast Asian countries has both external and
internal causes, mainly due to short selling factors of international hot money. The most crucial
thing is to return to the internal cause:

The biggest drawback of Southeast Asian countries is the lack of effective supervision of their
financial systems. Due to the rapid economic development of Southeast Asian countries in the
1990s, the government adhered to a laissez faire policy towards this development model. The
lack of effective supervision and constraints while providing financial support and subsidies to
financial institutions has provided confidence for high-risk projects loaned by bank shareholders.
Once the number of loan institutions increases, the expected returns cannot keep up, and the
institutions face losses and operational difficulties, which can easily lead to crises.

Excessive reliance on foreign investment. High economic growth strategy needs investment rate
to maintain, and investment rate needs huge amount of funds to maintain. However, Southeast
Asian countries with weak foundation can only focus on the international capital market when
they cannot get enough funds at home: massive foreign debts lead to increased debt burden, and
the increase of Money supply leads to domestic credit expansion.

The economy lacks quality. Most of the funds raised by the massive foreign debt were not
invested in increasing production capacity and changing the industrial structure, but were
invested in non trade service industries such as real estate and securities market, which led to
serious foam in the real estate industry and the stock market and foreign exchange market.

A rigid Exchange rate regime. Most of the Exchange rate regime of Southeast Asian countries
anchor the US dollar, while the major trading countries are scattered. When the US dollar
anchors too much currency exchange rate, the interaction between Southeast Asian countries
and major trading countries will not be compatible. In addition, the use of the Fixed exchange
rate system has not curbed its domestic inflation, but also made its real exchange rate rise,
increased the pressure on exports and import demand, and exacerbated the current trade deficit.

Due to the impact of this crisis on the entire financial sector of Southeast Asian countries, from
the stock market, currency market, bond market to the real estate industry, and ultimately the
entire economic system. Currency crises, banking crises, and debt crises occur one after another
and coexist, therefore they can also be defined as systemic financial crises.

From the perspective of the mechanism of systemic financial crises, they mainly occur in
countries or regions with prosperous financial assets, high marketization and internationalization
of financial markets, severe overvaluation of financial assets, and severe fiscal and external debt.

Firstly, the prosperity of financial assets is a prerequisite for the occurrence of a systemic financial
crisis. Regions that appear to be prosperous in terms of financial economy, prosperous in terms
of financial assets, and developed in terms of financial systems often have a crisis opportunity
due to their lack of correlation and systematicity.

Secondly, the high degree of internationalization of the financial market means that the door of
the financial market is greatly open to national capital, lacking effective control over domestic
capital, and thus losing control of the overall development layout and planning of the financial
market. Control.

Thirdly, when a large number of financial assets are severely overvalued and there is also strong
liquidity, according to economic cycle theory, the trend is for asset value to shrink. Because high
liquidity means that a large number of financial assets flow, conversion and realization costs are
very low, and the market environment is increasingly mature, which will bring mixed operation
phenomenon in the financial industry, and its Liquidity risk and Moral hazard window coexist and
expand.

Fourthly, when a country or region's fiscal deficit and debt crisis are very serious, it is like a
company's capital chain breaking and the huge gears of operation suddenly getting stuck. The
crisis fermented and spread to the stock market, foreign exchange market, and bond market,
causing a sharp decline in financial assets in the region.