(July 24): Twenty years ago, Steven Koh was working at the Jakarta office of BDNI Securities, part of the Gajah Tunggal group. Among the projects on his plate was the public listing of five companies, including a prawn farm that was being valued at some US$300 million.

If the prawn farm had listed, and the region’s economies continued booming, he figures he and his colleagues would have pocketed bonuses equivalent to five years of their salaries.

“Everyone was borrowing cheap US dollars. They thought the day of reckoning would never come,” Koh recalls of those heady times. However, in May 1997, hedge funds began shorting the Thai baht, sparking a contagion of selling in currency and stock markets across Southeast Asia.

Koh remembers hearing stories of trading desks at Hong Kong-based banks piling on the short-selling pressure as news of financial and economic turmoil spread. “They shorted even more, they didn’t bother to cover,” Koh says. “Each desk made between US$30 million and US$50 million.”

As the Indonesian rupiah lost about two-thirds of its value against the greenback within six months, financial liquidity dried up and business activity came to a juddering halt.

Jalan Sudirman, a main thoroughfare across Jakarta’s CBD that is usually gridlocked with traffic, was suddenly deserted. “It was like Shenton Way on Sundays,” says Koh.

Then came the corporate downsizing. Koh and about 400 other expatriates employed by the Gajah Tunggal group, many of them on US dollar pay packages, were suddenly unaffordable.

“We were all laid off,” says Koh, who got the axe in February 1998. He went on to join JM Sassoon in August 1999 and later came back to Singapore to work for Standard and Poor’s and other firms. He is now a fund manager at Overseas Chinese Investment Management (OCIM).

Only a few years later, however, many of the companies that had been crushed by the crisis had restructured themselves and were growing again. Many began investing in China, which welcomed them with open arms.

In fact, by 2004, Gajah Tunggal, the group that employed Koh in the 1990s, was operating a tyre manufacturing business in China that generated annual revenues of US$1 billion, and counted itself the biggest player in the replacement market.

Now, some market watchers in Singapore are nervously handicapping the odds of another big financial shakeout in the region. This comes as the US Federal Reserve normalises its ultra-loose monetary policy and China tries to manage a tricky economic transition, which could result in slower growth and turbulence in its asset markets and affect Southeast Asia.

Besides being a major trading partner of Southeast Asia, China is also a big investor. In 2015, China’s foreign direct investment into Asean rose 18.1% to US$8.3 billion from just below US$7 billion the preceding year. By contrast, total FDI into Asean over the same two years dropped 7.1% to US$120.8 billion.

Much like Southeast Asia on the brink of the Asian financial crisis (AFC), China has enjoyed several years of strong growth driven by investment demand. In the process, asset prices in the country have inflated and debt levels have ballooned as a proportion of its GDP.

Some markets are now worried about a disorderly unwinding of the imbalances that have built up. In the past year, big outflows of capital and weakness in the renminbi have forced the government to impose a series of capital controls.

In May, Moody’s Investors Service downgraded China’s credit rating, warning that economic growth was going to slow even as its debt levels continued to rise.

Yet, unlike Southeast Asia 20 years ago, China has not been running current account deficits. And, even after a surge in capital outflows over the past year, it still has a mountain of foreign exchange reserves. Moreover, its debt levels are largely domestic.

While Indonesia had to accept tough reforms that crushed its growth in exchange for a bailout from the International Monetary Fund back in October 1997, China today has lots of flexibility to manage its economic imbalances, reducing the risk of a sudden slowdown of growth that affects Southeast Asia.

Suan Teck Kin, senior economist at United Overseas Bank, is among the optimists. The way he sees it, the capital controls that China has imposed in the past year are to ensure that outbound capital does not flow into overinflated overseas real estate and trophy assets such as football clubs but into economically productive assets that help advance China’s development.

For example, the controls did not prevent ChemChina from completing its US$43 billion ($59 billion) acquisition of Swiss chemicals giant Syngenta in June, Suan points out.

Suan also notes that some 95% of China’s debts are denominated in renminbi, and state-owned enterprises still dominate large swathes of the economy, which provides the government with the ability to wield administrative power to keep the economy on an even keel. “For selfish reasons, they will contain whatever systemic crisis that might happen. Can they do it? Of course — they have enough resources,” he says.

In any case, the regional economies that were battered by the AFC 20 years ago have evolved too, and are now more resilient. Like China, they have accumulated large foreign exchange reserves and are running current account surpluses except Indonesia. Banks in the region are also better capitalised and have become more effective in managing their asset quality.

In addition, the corporates are less reliant on bank loans for funding. Instead, many have turned to the bond market, Suan notes.

‘Watch the door’
Sean Quek, head of equity research at Bank of Singapore, is more circumspect and warns investors not to underestimate the extent to which the Fed’s ultra-loose monetary policy helped to support regional markets in recent years.

As the US central bank now winds back the liquidity it provided, investors need to become more discerning. “We need to move back to a more fundamentals-driven picture — whether there’s economic or earnings growth,” he says.

As for China, Quek sees a “stop and go” story unfolding in the years ahead, with the government sometimes reining back growth to prevent debt levels from rising too much and sometimes applying fiscal or monetary stimulus to prevent the economy from slowing and causing too much unemployment.

Quek explains this using the analogy of pushing a trolley cart. “You push the trolley, it moves, and once you stop pushing, it starts to slow down and you start to push again,” he says.

For investors, this means having to adopt a tactical strategy rather than a buy-and-hold approach to putting money to work, he adds.

Quek was one month into a job as a research assistant at Credit Suisse when the AFC broke out. Fortunately for him, Credit Suisse took the opportunity to double down and expand. Notably, it bought Barclays de Zoete Wedd’s operations in Singapore and Malaysia.

Quek ended up spending 14 years at Credit Suisse, during which time it expanded from three offices in the region to 15. “In that way, I was lucky; I joined an organisation that was growing,” he says.

While Quek is not expecting a repeat of the AFC anytime soon, he does not discount the possibility of some “black swan” event triggering a sudden slump. Even if investors are prepared with an exit strategy, executing it when broad market liquidity dries up is always tough.

“We always say, ‘Watch the door, get out of the room’. The problem is, when everybody wants to get out, the door becomes too small. That’s something we are mindful of,” Quek says.

China’s big ambitions
According to Quek, China is the current focus of the market because it has grown so fast in the last 20 years. In the 1970s and 1980s, there were similar concerns about the influence of Japan on the region. “When you are big, of course, you are going to have more direct and indirect impact,” he says.

Yet, with the strong growth it has charted, China has big ambitions to take its seat at the global table and for the renminbi to become an international reserve currency. To achieve this, it is actively pursuing broad reforms and working towards a more open capital account and flexible exchange rate.

As its economy and financial system develop and it is integrated into the global system, China will not be any more of a risk to the region than Japan, Europe or the US, some market watchers say.

That is not to say that there will not be any more crises along the way. Bankers and brokers who witnessed the economic devastation triggered by the hedge funds that began shorting the Thai baht 20 years ago say it could all happen again.

“Human memory is pretty short,” says Koh, the fund manager at OCIM. “A new generation will emerge and throw caution to the wind again. Lots of these crises happen because of access to cheap credit — projects are not evaluated based on their risk and viability, so more risks were taken on. That day will come again, in another form, whether in this region or somewhere else.”

This article appears in Issue 789 (July 24) of The Edge Singapore which is on sale now