HSBC Chief Economist Frederick Neumann has pointed to several notable similarities between the current economic environment in Asia and the conditions that preceded the Asian Financial Crisis of 1997. However, he believes the nature of the region’s biggest risk has changed considerably. Rising US Treasury yields, weakness in the Japanese yen and strong enthusiasm surrounding the technology sector are creating an economic backdrop that bears some resemblance to the period before the 1997 crisis. Neumann outlined these comparisons in an August 31 note, examining how current market conditions compare with those that contributed to the severe financial turmoil almost three decades ago. According to a CNBC report, Neumann said that while the historical similarities deserve attention, Asia's main vulnerability today is no longer centered on weak banks and financial systems. Instead, the region has become increasingly dependent on demand from the United States for artificial intelligence related hardware and technology products. One of the major similarities involves US Treasury yields. Before the 1997 crisis, the yield on the US 10 year Treasury note climbed from about 5 percent in October 1993 to almost 8 percent in November 1994. It was still close to 7 percent by April 1997. In the present cycle, yields have increased by approximately 80 basis points since February, reaching around 4.79 percent. This is significantly above the historic low of about 0.5 percent recorded in August 2020. Movements in the Japanese yen provide another point of comparison. Between April 1995 and April 1997, the yen lost approximately 55 percent of its value against the US dollar, falling from around 80 yen per dollar to about 130. In the latest cycle, the yen declined by roughly 57 percent, moving from nearly 103 per dollar in January 2021 to around 163 in July. The sharp depreciation even led Washington and Tokyo to take joint measures to help stabilise the currency near the 160 level, CNBC reported. Another similarity can be seen in investor enthusiasm for technology. During the 1990s, optimism surrounding the emerging internet industry was a major feature of financial markets. Today, artificial intelligence has taken on a similar role, driving significant interest and investment across the technology sector. Despite these similarities, Neumann emphasised that the differences between the present situation and 1997 are more important than the similarities. During the 1990s, several Asian economies depended heavily on overseas capital to finance domestic investment. Many were running substantial current account deficits while their banking systems remained vulnerable. When borrowing costs increased, foreign investors quickly withdrew their money. This placed pressure on local currencies, weakened currency arrangements and contributed to banking failures across countries including Thailand and South Korea. The situation is considerably different today. Many of the same Asian economies have become net exporters of capital and have accumulated large foreign exchange reserves. These financial buffers provide greater protection against sudden shortages of dollar liquidity and external funding pressure. However, Neumann believes Asia has developed a different type of vulnerability. Major manufacturing economies such as South Korea, Japan, Taiwan and Singapore depend heavily on electronics and semiconductor exports. A significant portion of this demand comes from major US technology companies that are spending heavily on artificial intelligence infrastructure, according to CNBC. Neumann described this shift as a move from financial vulnerability to demand vulnerability. In his assessment, Asia is now particularly exposed to changes in American demand for technology related products. If higher US Treasury yields and rising financing costs force major US technology companies to reduce their spending on data centres, Asian exporters could feel the effects quickly. Greater volatility in the yen could also create pressure across international funding markets. The impact would therefore look very different from the events of 1997. Instead of a sudden banking panic spreading through financial institutions, the region could experience a rapid decline in orders for electronics and semiconductor products. Such a slowdown could put significant pressure on some of Asia’s most important export industries and manufacturing economies.