Business

Hong Kong's crisis

Panic selling rattles stock markets around the world

SHARON DOYLE DRIEDGER November 3 1997
Business

Hong Kong's crisis

Panic selling rattles stock markets around the world

SHARON DOYLE DRIEDGER November 3 1997

Hong Kong's crisis

Panic selling rattles stock markets around the world

SHARON DOYLE DRIEDGER

Business

It was a virtual money machine. Month after month, the supercharged Hong Kong stock market piled up profits in an apparently unending binge. While so-called Asian Tigers, such as Thailand and Malaysia, were falling by the financial wayside, the tiny island remained a virtual haven of prosperity, even in the tense weeks following its reunification with China. The stock exchange’s blue-chip Hang Seng index reached historic highs, increasing more than 50 per cent over the past year. But last week, the Hong Kong surge came to a sudden—and, for many investors, terrifying—stop. In only four days, the Hang Seng index fell a staggering 23 per cent in what one local newspaper called the “Crash of ’97.” On Thursday alone, Hong Kong investors lost $40.7 billion in paper wealth, the exchange’s largest drop in a single day. By week’s end, the market had recovered nearly seven per cent of its losses and it looked as though a meltdown had been avert« ed—or at least contained. One Hong 5 Kong broker, Howard Gorges of §

South China Brokerage, said in obviï ous relief: “Things are showing signs | of getting back to normal more quick§ ly than people expected.” Investors monitoring

But around the world, nervous inshare prices in a Hong vestors spent their weekend holding Kong bank: reality check their breath. Thursday’s 10-per-cent

collapse in Hong Kong—coming only days after the 10th anniversary of the Black Monday crash of Oct. 19, 1987—provoked nearpanic in equity markets throughout Asia, Europe and North America. In the wake of Hong Kong’s free fall, the Dow Jones industrial average and the Toronto Stock Exchange’s 300 index both fell on the final two days of the week, four per cent for the Dow Jones and two per cent for the TSE. The following day saw additional losses, and many experts remain bearish about the long-term prospects for stocks. “Everybody is saying this is serious,” says Katherine Beattie, a senior technical analyst with MMS International, a Torontobased financial information service. “It could be the catalyst for a 10to 15-per-cent correction in worldwide stock markets.”

Other observers argued that last week’s setback was not the start of a global crash, but a reality check for Hong Kong. “I don’t think there is a crisis here,” says Andrew Karolyi, a professor of finance at the University of Western Ontario in London. At one time, money managers feared that China’s takeover of the former British colony on July 1 would have a negative impact on its stock market. But as the day approached, investors began to view the handover as a potentially lucrative opportunity to capitalize on China’s rapid economic growth. “Euphoria pushed the market to historic highs,” says Ron Richardson, an analyst with the Asia-Pacific Foundation, a Vancouverbased think-tank. “The economic perception has been, ‘Boy, here’s China, feeding all its trade through Hong Kong, giving us a shot at providing the banking and services to support Chinese growth and expansion.’ ” Earlier this year, Hong Kong investors lined up to pay billions of dollars for shares in newly privatized mainland companies, helping boost the Hang Seng index to unprecedented heights. “This was ‘red-chip’ fever,” says Garrett Lambert, a business professor at the University of Victoria who recently returned from a stint as Canada’s consul general in Hong Kong. “There was an absolute belief that the Chinese government would support the market and not allow the value of any of those shares to decline—at least in the short run.” But Hong Kong’s new status also means economic integration with China, a potential source of instability. Now, the former British colony is feeling the pressure as the Chinese economy slows, inflation hovers at about nine per cent and profits from former Communist enterprises remain elusive. Just last week, China | floated $5.6 billion worth of stock in a ma| jor telecommunications company—but the share issue proved less popular than ex§ pected. “The government of China is not interfering in the day-to-day administration of the territory,” notes Lambert. “But neither is it underpinning the Hong Kong stock market.” A key issue for investors over the next few weeks is how far the Chinese government will go to protect the value of the Hong Kong dollar. The former colony’s decision 14 years ago to peg its currency to the U.S. dollar has been a source of financial stability ever since. But recently, the chairman of the Hong Kong General Chamber of Commerce suggested that the policy was making it difficult for local manufacturers to compete with rivals elsewhere in East Asia. Currency speculators seized on his remarks as a possible sign of weakening in the government’s support for the Hong Kong dollar.

I Lambert, for one, believes that Hong Kong has no choice but to resist devaluation in order to preserve its credibility with investors. But consumers and businesses in the metropolis are paying a heavy price. To fend off what they termed a speculative attack on the currency, Hong Kong’s monetary authority briefly hiked the interbank rate, the price banks charge each other for overnight loans, to 300 per cent.

Banks, meanwhile, raised their prime rate from 8.75 per cent to 9.5 per cent— a serious blow to a stock market in which real estate makes up 60 per cent of the total share value. “All of this means that we’re probably into a period of significant volatility,” says Lambert.

Joe Zhang, an analyst at Credit Lyonnais in Hong Kong, added that further increases in interest rates could cause property prices to tumble. “Then you have massive defaults on mortgages, and then collapse of the banks, and then the collapse of the economy.”

With no government debt and a whopping $122 billion sitting in its reserves, Hong Kong appears well equipped to weather the storm. In fact, most experts say the financial woes of nearby countries such as Indonesia, Thailand and the Philippines are more to blame for the stock exchange’s precipitous slide. “It’s like being the only person in the hospital who doesn’t have the flu,” says David

Bond, chief economist with the Hongkong Bank of Canada. “People say [Hong Kong is] going to get sick, too.”

Despite the plunge, Hong Kong’s market has proven in the past that it can rebound as fast as it falls. “Don’t forget that the Hang Seng had risen from about 12,000 points last spring to about 16,000 in August,” says Lambert. “So it shouldn’t surprise anybody that a major correction was in the offing.”

Some financial experts say the correction throughout East Asia creates a perfect opportunity for bargain hunters, but most are counselling caution. “Westerners have already invested far too much money in those areas,” insists Montreal investment counsel Stephen Jarislowsky. “The amount of democracy in those countries is the square root of nil, and the securities commissions are non-existent” Beattie is less bearish on Asia, but agrees that prudent players will wait

until the dust settles. “I wouldn’t be in there buying today—I’d want to see what happens.” Wait and see was a common approach at week’s end, as wary traders and investors anticipated the market’s next move. “The real issue—over which nobody has any control—is the mood of the institutional investors, particularly in North America and Europe,” says Lambert. “In the end, the psychology of the marketplace is more important than facts.” Be that as it may, the facts confronting Hong Kong investors last week were sobering indeed. □