Another Asian Financial Crisis Unlikely

Economist shares his insight on the outlook for emerging markets.

Senior ETF Analyst
Reviewed by: Sumit Roy
Edited by: Sumit Roy

Gareth Leather is an emerging market economist at Capital Economics. He has been covering Asia for more than 10 years, and has built extensive knowledge of the region. recently caught up with Leather to discuss the recent developments in emerging markets in light of the tumultuous action in financial markets during the past several days. China's stock market continues to crash despite numerous attempts by authorities to prop it up. Why do you think that is?

Gareth Leather: It's definitely a bubble that's bursting. You had a big run-up in the stock market in the first half of the year and then it suddenly turned over the past couple of months or so. It became quite clear that the improvement in the stock market wasn't in any way supported by fundamentals. In the near term, it's difficult to know exactly what's going to happen. It's like catching a falling knife; but, you think at some point it's going to eventually stabilize.

It now appears that the Chinese authorities are going to let the stock market find its own level. A lot of people are disappointed by that, and it has triggered more declines there. That creates a ripple effect across the rest of the region and ultimately the rest of the world. Stock market aside, how is China's economy doing? Is it growing by less than the 7 percent GDP figure that the government is reporting?

Leather: It's interesting; the stock market and the real economy don't really have any kind of correlation at all. There was no economic justification for the big boom that we saw in the stock market in the first half of the year and equally, there's nothing to justify the sharp decline that we've seen.

Our estimates suggest that the economy's almost certainly not growing as fast as the official figures suggest, but it's still probably growing at around 5 or 6 percent, which for an economy of China's level of development, is still quite encouraging.

More importantly, if you look at the main drivers of growth, it's no longer fixed asset investment―which a lot of people were arguing was unsustainable―it's the service sector that's doing a lot better. So although growth is slower, it's arguably a bit better balanced as well. We've seen other emerging markets struggling due to the impact from China. Which countries are you most concerned about, and do you see any risk of the 1997-style Asian financial crisis?

Leather: The economies that have been hit the hardest so far are those that are big commodity exporters, particularly the ones in Latin America and Africa. Those are the ones that we've highlighted as the ones that are most vulnerable to a China hard landing.

Brazil, for example, is doing very poorly, and seeing its exports to China falling about 40 percent year-on-year.

In terms of comparisons with the Asian financial crisis of 18 years ago, they look wide off the mark to us. If you look at the four potential triggers that were behind what happened in Asia in '97/'98, we don't see them today.

A lot of the emerging market currencies are floating to the dollar, and not fixed like before, which means we haven't had these big buildups of imbalances that we previously saw. It's also noticeable that current accounts are now in surplus, while they were in deficit before.

Foreign reserves are also much higher, which means the authorities have the ammunition to defend their currencies. And finally, external debt―foreign debt―is a lot lower than it was back then. How do the rapidly depreciating emerging market currencies play into all this? Is that something to keep an eye on?

Leather: It's certainly a big issue for some countries. But for most places, foreign currency debt is quite low, and inflation is also quite low. So it's not a huge concern for these places, and they may actually welcome the boost that it's going to provide to their export competitiveness.

For a few places like Turkey―which has a high level of foreign currency debt―and Russia―where inflation is very high—falling currencies are more of an issue. But on the whole, provided we don't see a large-scale decline where currencies fall 20 percent in a week, I don't think it's a huge concern for policymakers.

Contact Sumit Roy at [email protected].

Sumit Roy is the senior ETF analyst for, where he has worked for 13 years. He creates a variety of content for the platform, including news articles, analysis pieces, videos and podcasts.

Before joining, Sumit was the managing editor and commodities analyst for Hard Assets Investor. In those roles, he was responsible for most of the operations of HAI, a website dedicated to education about commodities investing.

Though he still closely follows the commodities beat, Sumit covers a much broader assortment of topics for, with a particular focus on stock and bond exchange-traded funds.

He is the host of’s Talk ETFs, a popular video series that features weekly interviews with thought leaders in the ETF industry. Sumit is also co-host of Exchange Traded Fridays,’s weekly podcast series.

He lives in the San Francisco Bay Area, where he enjoys climbing the city’s steep hills, playing chess and snowboarding in Lake Tahoe.