At the beginning of February, 1997, international investment institutions set off a wave of selling Thai baht, which caused the Thai baht exchange rate to fluctuate greatly. 1In February, 1997, the Bank of Thailand began to borrow Thai baht forward contracts with a term as high as1500 million dollars from Thai banks, and then sold them on a large scale in the spot foreign exchange market, which increased the pressure of Thai baht exchange rate fluctuation and caused turmoil in Thailand's financial market. Only in February of 1997, US$ 2 billion of foreign exchange reserves were used, which initially subsided. On March 4th, the Central Bank of Thailand asked nine finance companies and 1 housing loan companies with liquidity problems to increase their capital by 8.25 billion baht (3170,000 USD). Banks and other financial institutions are required to increase the bad debt reserve ratio from 65,438+000% to 65,438+05% ~ 65,438+020%, which will increase the reserve of the financial system by 50 billion baht (US$ 6,543.8+094 billion). The Bank of Thailand's move aims to strengthen the stability of the financial system and enhance people's confidence in the financial market. However, not only did it not play its due stabilizing role, but it made the public's confidence in financial institutions decline, causing squeeze. On the 5th and 6th, investors approached 65,438,050 billion baht (about 577 million US dollars) from 65,438+00 financial companies with problems. At the same time, investors sold a lot of shares of banks and financial companies, which led to a continuous decline in the Thai stock market. The foreign exchange market is also facing downward pressure. With the strong intervention of the Bank of Thailand, Thailand's stock market and foreign exchange market temporarily stabilized. In May, the speculation of Thai baht by international investment institutions became more intense. On May 7, currency speculators quietly established spot and forward foreign exchange trading positions through foreign banks operating offshore business. From May 8, they borrowed Thai baht from local banks in Thailand and sold a lot of Thai baht in the spot and forward markets. Suddenly shorting the Thai baht in the market led to a sharp drop in the spot exchange rate of the Thai baht, which broke through the floating ceiling of the exchange rate stipulated by the Central Bank of Thailand many times, causing market panic. Local banks, enterprises and foreign banks have entered the market one after another, selling Thai baht immediately to snap up US dollars or selling it as a forward hedging transaction against US dollars, which led to the further deterioration of Thailand's financial market, and the Thai baht once fell to the level of 26. Against the dollar 94: 1. The Bank of Thailand stepped up its intervention in the financial market, using about $5 billion in foreign exchange to intervene, and obtained different forms of support from the central banks of Japan, Singapore, Hong Kong, Malaysia, the Philippines, Indonesia and other countries and regions. At the same time, the Central Bank of Thailand raised the interest rate of offshore loans to 65,438+0,000%, which increased the cost of speculating on Thai baht and prohibited Thai banks from lending Thai baht. Through a series of measures, the Thai baht exchange rate stabilized and the Central Bank of Thailand temporarily controlled the situation. In the middle and late June, the resignation of Thailand's former finance minister triggered financial speculation about the possible devaluation of the Thai baht, which led to the Thai baht exchange rate plummeting to around 1 US dollar against 28 baht. Thailand's stock market also fell from 1.200 at the beginning of the year to 46 1.32, the lowest point in eight years. In July, the financial market was in chaos. The Central Bank of Thailand suddenly announced that it would abandon the exchange rate policy of 14 baht pegged to the US dollar and implement a managed floating exchange rate system. At the same time, the central bank also announced that it would raise the interest rate from 10. 5% to 12. 5%. The Thai baht fell 17% that day. Set a new low. A financial crisis broke out in Thailand. The financial crisis triggered by the devaluation of the Thai baht has dealt a heavy blow to Thailand's economic development, resulting in rising prices, high interest rates, increased foreign debts of enterprises, tight liquidity, operational difficulties, stock market crash and economic recession. The main idea of this theory is that people need foreign currency because they have purchasing power in foreign countries. Therefore, the exchange rates of the two currencies are mainly determined by their purchasing power in their own countries. Suppose a group of goods needs 1 in Britain and $2 in the United States, and the ratio of purchasing power between the two countries is 2:l, then the exchange rate of these two currencies should be 1 pound = $2. When the above conditions are met, if the exchange rate of foreign exchange transactions obviously deviates from purchasing power parity, then the relative price level of one country will deviate greatly from that of another country after exchange rate conversion, which provides an opportunity for commodity hedging. For example, if the exchange rate in the foreign exchange market is 1 = 1, which deviates from the above purchasing power parity, people will use pounds to buy a large number of goods from Britain and export them to the United States, and throw the acquired dollars into the foreign exchange market and convert them into pounds. As a result, the exchange rate of the pound rose, while the exchange rate of the dollar fell accordingly until it was consistent with purchasing power parity. Let's review what happened in Thailand's foreign exchange market in the early days of 197. A dealer may borrow 100 baht from a bank for six months, and then the dealer will convert 100 baht into US$ 4 (the exchange rate is 1 US =26 baht). If the exchange rate drops to 1 USD =50 baht, after 6 months, the dealer can buy back 100 baht for only $2, and return these baht to the dealer 100% profit. Through the above example, we can see that in six months, 100% income can only be explained by purchasing power parity theory, and can only be explained by soaring prices and serious inflation in Thailand; And if we understand money as a special commodity, according to the calculation formula of relative purchasing power parity theory, relative purchasing power = base exchange rate * (price index of country B/price index of country A). As can be seen from the formula, because the base exchange rate remains unchanged, the factor that determines the relative purchasing power level is the ratio of the price indexes of the two countries. The lower the relative purchasing power, the smaller the ratio between the two countries. Of course, the most fatal attack on purchasing power parity theory is that it completely ignores the influence of capital account balance on exchange rate. The influence of capital account balance on exchange rate is increasing day by day. From the example of Thailand, the huge deficit under the capital account accelerated the collapse of the Thai baht, and the government had to sell a lot of dollars to stabilize the local currency.