Hong Kong Changes Its Tune Over Speculators
International Herald Tribune
October 3, 1998
Philip Segal

A year ago, Prime Minister Mahathir bin Mohamad of Malaysia stood up in front of the annual meeting of the World Bank and International Monetary Fund and said that international currency speculation should be banned. Bankers in the audience shook their heads, almost pitying a leader so out of touch with how the real world worked.

One year later, one of the least interventionist economies in the world — Hong Kong — is also calling for international controls on "manipulators" of markets, and has for the first time intervened in the stock market to support prices. Like Malaysia's government, the Hong Kong authorities are now saying that they, and not the market, know best when stocks and currencies are at an appropriate value.

Before his speech in 1997, Mr. Mahathir had been well on his way toward spooking foreign investors with a series of abruptly imposed, and just as quickly withdrawn, measures to prop up his country's markets. But a much more recent radical break with the past has been Hong Kong's newly interventionist approach.

"It's almost as if they're taking a leaf out of Mahathir's book," said Philip Moffitt, vice president at Tokai Asia Ltd., a subsidiary of Japan's Tokai Bank. "No matter what they say to pacify the locals, their credibility with providers of international capital is shot."

So extraordinary was Hong Kong's stock market intervention that government officials felt obliged through September to deny repeatedly that Hong Kong would impose the sort of capital controls that Malaysia announced on Sept. 1, even though these are forbidden by Hong Kong's constitution.

Aside from a comment on the perceived value of Hong Kong's constitution, the jitters in Hong Kong and the fact that other governments are pondering capital controls are born of the fact that Asia is in uncharted waters. Across the region, policymakers who used to embrace open capital flows are rattled, because nothing in their experience had prepared them for the economic shock the region has been suffering. In the speed that economic boom times have given way to widespread misery, Asia has surpassed even the Great Depression.

This is a lesson not lost on either the people of Asia or its politicians. Since the crisis began in July 1997, governments have changed in South Korea, Thailand, the Philippines and, most dramatically, Indonesia. Malaysia's heir-apparent, Anwar Ibrahim, who disagreed with Mr. Mahathir's approach, was fired and then arrested. Whatever the political system, hard times cause headaches for leaders, who grow increasingly desperate for a new way to stop the economic pain.

What worries Asia's leaders so much is that the recipe which fueled growth in the past — ratcheting up exports — is not working the way it used to. Asian countries are all so dependent on one another for trade that no one in the region wants to buy a lot of these exports. Plus, Asian banks are in many cases simply broke.

"You can try selling a telephone in Korea for $50 or $10. It doesn't matter. The problem is that Korea doesn't have any money. The same goes for all the countries around the region," said Clive McDonnell, economist at SG Securities in Hong Kong.

"This is a depression in Asia, not a recession," Marc Faber, a Hong Kong fund manager, told Barron's magazine recently.

In Hong Kong, suffering so far from a deep recession only, the problem the economy faces is the need for consistently high interest rates to protect the currency link to the U.S. dollar. With repeated government exhortations to the public that they should buy stocks now that the market has bottomed, followed by an unprecedented, $12.5 billion government buying spree, Hong Kong's risk premium has ballooned in the past year because markets doubt the government's willingness to accept the pain of asset price deflation.

The risk premium in Hong Kong used to approach zero, but today investors are asking for about five percentage points more in yield that they would receive for comparable one-year U.S. Treasury paper. Hong Kong is hardly Zimbabwe or Russia, said Mr. Moffitt, but the days of negative real interest rates in the territory are gone, and are unlikely to make their way back soon. Ironically, just as Asia is looking at tightening controls, one of the success stories that has inspired renewed support of capital controls — Chile — decided in September to loosen restrictions on foreign capital.

While Hong Kong may not have gone as far as advocating capital controls, Financial Secretary Donald Tsang is now talking about international control of speculators: "We believe that there has to be some discipline, universally and internationally agreed discipline, in regulating the flow of funds which are used for speculative purposes."

What a change a couple of years makes. In 1996, the deputy chairman of Hong Kong's Securities and Futures Commission, Michael Wu, would have poured scorn on such an opinion. - IN a speech at the time, he said: '' The word 'speculator' or 'speculation' has a certain degree of stigma attached to it. Speculation, speculative activities and speculators tend to be perceived as bad news. The truth is, however, quite the opposite. All markets are speculative since every time an investor enters the market, he expects the market to go a certain direction. Since there is no certainty that the market will indeed act as he expects, he is effectively 'speculating' on where it is going.'' How will Malaysia and Hong Kong's war on speculators end? Malaysia seems destined to see sell-offs by foreigners unwilling to invest and wait a year before repatriating their funds. As for Hong Kong, the irony is that further speculation against the Hong Kong dollar — made more tempting by the government's unwillingness to see asset prices fall further — may threaten the sturdiness of China's currency, the yuan. A year ago, the betting might have been that it would be China that brought down Hong Kong's currency, not the reverse. Now, in the words of Santander Investment's weekly report, ''Greed & Fear'': ''If a future currency panic in Hong Kong coincides with a negative trend in Chinese exports, then Beijing may have the excuse it is looking for to change exchange rate policy.'' - PHILIP SEGAL is a special correspondent for the International Herald Tribune in Hong Kong.

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