Competitiveness was eroded by the 40 per cent devaluation of the Chinese currency in 1994. Firms’ growing dependence on foreign loans, denominated mostly in dollars, the preponderantly short-term nature of the debt and shortcomings in the supervision of financial intermediaries made financial systems more fragile. The uncertain performance of the Japanese economy and financial system exerted a negative influence.
The crisis started and spread when market participants came to recognize the difficulty of sustaining exchange rates in the face of the sharp and continuing appreciation of the dollar and expectations of increases in interest rates in the United States. The possibility emerged of heavy losses by firms; growth prospects were scaled back, with further adverse effects on stock markets.