Asian Economies Face New Vulnerability from AI Demand Shock

HSBC's chief Asia economist Frederick Neumann has drawn parallels between the current macroeconomic environment and the conditions that led to the 1997 Asian financial crisis. Rising US Treasury yields, a plummeting Japanese yen, and investor exuberance around artificial intelligence (AI) are among the factors he cites.

The current trajectory of rising US Treasury yields bears an uncomfortable resemblance to the mid-1990s, when rates surged from roughly 5% in October 1993 to nearly 8% by November 1994. Today's yield has climbed to approximately 4.79%, a move that has fundamentally repriced the cost of dollar funding worldwide.

Neumann also notes that the yen has depreciated, sliding from around 80 to the dollar in the early 1990s to its current level. This cheapens Japanese exports and puts pressure on other Asian economies, contributing to potential imbalances.

The AI investment cycle is driving capital into semiconductor and electronics exporters like South Korea, Japan, and Singapore, much like the internet revolution did in the mid-1990s. However, Neumann emphasizes that today's Asian economies are largely net capital exporters, with substantial foreign exchange reserves and regulatory frameworks rebuilt to prevent a repeat of the 1997 meltdown.

The new vulnerability lies in a potential downturn in US demand for AI hardware, which could have direct and painful consequences for Asia's most advanced economies. The US Treasury appears to be watching the yield situation carefully, with plans to double liquidity-support buybacks for longer-dated debt starting September 9.