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How
Did the Financial Crisis in Southeast Asia Happen?
By
Ju-chang He 14 October 1998
Recently, a financial turmoil,
or financial crisis, is taking place in Southeast Asian countries.
All the countries lay the blames on George Soros, an American speculator,
for this crisis. However, I hold a different opinion. A Chinese
saying goes: "It takes more than one cold day for the river to freeze
three feet deep." How is it possible for a speculator to ruin several
Asian countries in a few days? There must be reasons behind. Here,
I would like to dig out the reasons behind, allowing the countries,
especially the developing countries, to get a good lesson from it.
As is known to everyone, Southeast
Asian countries exercise a fixed exchange rate system connected
to US Dollars. What we should understand is that, to adopt a fixed
exchange rate, the first thing is to determine an exchange rate
level. For instance, 14 years ago, the Thai government fixed the
exchange rate of Thai Baht to US Dollars at a level of 24.70 Baht
to one Dollar. And this rate got fixed, not allowed to float. Is
this rate reasonable? 14 years ago, nobody knew. Now, with my deduction,
I've found this rate is not reasonable. It was too high 14 years
ago, but it was too low today.
Here goes my deduction:
- 14 years ago, if the rate of US Dollars was too low vs. the
Thai Baht, people in other countries possessing US Dollars would
not be happy. They would feel it a great loss to sell their Dollars
to Thailand. Thus it would be difficult for Thailand to obtain
US Dollars from the international market, and it would be impossible
for the fixed exchange rate system to operate even at that time.
According to this reasoning, I believe that 24.70 defined as the
rate of Dollars to Baht was too high 14 years ago. That is to
say, if one sold out his Baht for Dollars, he would lose. As a
result, the wealth of Thailand flowed out cheaply for purchasing
US Dollars. The reflection was a considerable increase of export
volume. As the wealth was flowing out, the devaluation of Baht
was aggravated, which caused the price to go up.
- For the last 14 years, the price level of Thailand has kept
going up. Last year, the price level was no longer acceptable
to foreigners. They felt it a loss to sell their Dollars for Baht.
Therefore, foreigners felt the fixed exchange rate of one Dollar
to 24.70 Baht was too low for them last year. The international
community thus had the common wish to increase the exchange rate
of US Dollars to Baht. As Thailand exercises fixed exchange rate,
their desire was hard to be satisfied and, therefore, became very
covert.
- At this time, George Soros became aware of this common desire
to increase the exchange rate of Dollars to Baht. He believed,
according to the price level in Thailand, that the fixed exchange
rate of one Dollar to 24.70 Baht was really too low, and to sell
Baht out for buying in Dollars would make the seller of Dollars
lose. Therefore, he borrowed a great number of Baht from the banks
worldwide. The amount was so huge that I estimate it might be
over 100 billion Baht. Then, he changed all these Baht to Dollars
according to the fixed exchange rate of 24.70. After all the Baht
were sold out, he began to scatter the rumors all over the world
that the Baht would devaluate, which made the Thai people begin
to sell their Baht in big quantities. But whom the Baht were sold
to? The foreigners had long since had the wish to increase the
exchange rate of US Dollars to Baht. Therefore, they would not
sell their Dollars to the Thai people at the fixed exchange rate
of one Dollar to 24.70 Thai Baht. The Thai people had to sell
their Baht to the Thai Government. The foreign exchange reserve
of Thai government was soon run out. Even after the foreign exchange
reserve of Thai government was empty, the demands for selling
the Baht were not yet satisfied, so as to force the Thai Government
to give up the fixed exchange rate. The exchange rate of US Dollars
was soon increased to one Dollar for 29.45 Baht. At this time,
Mr. Soros changed one portion of his Dollars back to Baht at the
new rate of 29.45 and paid back the principal and interest to
the banks. When he borrowed the Baht, he changed them to Dollars
at the rate of 24.70. After the Thai Government gave up the fixed
exchange rate, he changed back one portion of his Dollars at the
rate of 29.45. In such a deal, he made a very considerable profit.
Conclusion
- The devaluation of Thai Bath was not caused by this crisis,
as the devaluation had happened before the occurrence of the crisis.
With the fixed exchange rate carried out for 14 years, the prices
in Thailand increased to an unacceptable level for foreigners.
The fixed exchange rate did not allow the devaluation to be reflected
apparently by the exchange rate. This does not mean that Baht
had not devaluated before the Thai Government gave up its fixed
exchange rate.
- This financial crisis is just like an active volcano, and the
common wishes of the international communities for increasing
the exchange rate of US Dollars to Thai Baht are like the lava
boiling beneath. Mr. Soros is like the man who stirred the crater
of the volcano with an iron bar. It was because Mr. Soros gave
the crater a stir that the active volcano sprayed out in advance.
Obviously, it was not Mr. Soros, but the lava beneath that caused
the burst of the volcano. That is to say, it was the common wish
of the international communities to increase the exchange rate
of Dollars to Baht that caused the financial crisis. The volcano
would have burst sooner or later even if Mr. Soros hadn't stirred
the crater.
- China was not affected by this crisis, because it adopted strict
control over its currency. Mr. Soros had got no way to borrow
Renminbi yuan from the international banks. Without Renminbi yuan
in hand, he is not able to speculate in Renminbi yuan. But the
Chinese people should not be satisfied with the present situation.
There are over 60% of the population in China still living in
poverty. The living standards of the low-income families haven't
got a rise in the past years. In China, there are still a lot
of people who haven't got enough food and clothing and can't afford
to send their children to school. Many children at the school
age are deprived of education. Judging from my economic theory
and economic growth model, China is still one of the most underdeveloped
countries.
- In order to prevent the occurrence of similar financial crisis
in Southeast Asia, countries the world over should give up fixed
exchange rate as soon as possible and continue carrying out free
market economic policy.
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