State Support in Asia's Stock Markets Raises Investors' Suspicions 
International Herald Tribune
August 21, 1998
Thomas Fuller

East Asian stock markets continued to climb Thursday on the back of direct government buying, but many fund managers and analysts are beginning to say that the state-sponsored buying will leave long-term scars.

Ultimately, they said, government purchases in stock markets like Hong Kong's, which has long been seen as the region's bastion of free-market capitalism, create artificial price levels and make investors wary of the risk of future government activity, undermining the independence of the markets.

"I find it deeply disconcerting," said Bill Kaye, managing partner of Asian Hedge Fund LP in Hong Kong. "It raises the risk profile of Hong Kong. And it raises the cost of investing here."

Some analysts say the government's direct purchases of equities contradicted the basic idea that a stock market should reflect the expectations of a company's performance.

The benchmark Malaysian stock index rose 2.2 percent Thursday. On Wednesday, it rose 8.8 percent in its biggest one-day rise in six months.

In Hong Kong, stocks rose 1.57 percent Thursday, up 7.4 percent in three days.

Prime Minister Mahathir bin Mohamad of Malaysia said Thursday that Kuala Lumpur would ask investment funds run by the state to make purchases in the stock market.

Dealers told Agence France-Presse on Thursday that the fund had "nibbled" in the afternoon session.

But it was the unprecedented intervention in Hong Kong this week that received the most attention. By one estimate, the Hong Kong government now holds $2 billion worth of local stocks

Governments often intervene in currency markets, but direct buying of shares on stock exchanges is rare in developed countries.

"Essentially, the government has tried to temporarily nationalize the Hong Kong index," said Marshall Mays, chief strategist at Nikko Securities Co.

"In the name of providing some protection or assurance for the market, it has basically taken away some of the incentive for the market to cure itself," he told the CNBC television network.

Hong Kong last week also issued a waiver — the first in its history — to China Telecom, allowing it to buy back shares beyond the level stipulated by securities rules. The move was reminiscent of waivers in Malaysia late last year that caused the stock market to tumble.

Mr. Kaye said prices on the Hong Kong market were now "distorted and manipulated."

"There's been a major buyer out there who doesn't have an investment objective," he said. "He has an objective of attempting to rig prices."

Government finance officials defended the intervention as needed to fend off manipulators who had "little regard to the economic fundamentals of Hong Kong and the extent of the market adjustments that have already taken place."

"I have considerable sympathy for their intentions we're really in a situation which is terrible," said Deep Kapur, market strategist at Salomon Smith Barney in Singapore. "Unfortunately I'm very skeptical whether it will be possible to translate these good intentions into anything meaningful, given the way the markets work."

The precedents of market intervention in Asia do not augur well: For a few weeks in May 1997, Thailand managed to muscle out speculators attacking its currency. But the victory was Pyhrric. Faced with dwindling reserves the country was forced to devalue a few weeks later, the first in a string of Southeast Asian devaluations.

When intense selling pressure hit the Malaysian stock exchange last year, Mr. Mahathir announced the creation of a $20 billion stock exchange support fund. The plan quickly fizzled, and the market continued to slide.

In Japan, the term "price-keeping operation" was invented to describe Tokyo's numerous stock market interventions over the past decade — which have done little to shore up the real economy.

Like Hong Kong, the Japanese government had ample funds at its disposal. But in the long run, the Tokyo stock market has been unable to shake off the shadow of its recession-bound economy.

"This is like taking Valium when you've been diagnosed with AIDS," Mr. Kaye said of intervention. "It may make you feel better, but it's not doing anything for the underlying problem.

"And it could potentially make things much worse because if there's one thing that Hong Kong does not need now is an abandonment of the international financial community," he said. "And I think that's a very substantial risk."

Not everyone says that the intervention in Hong Kong was a bad thing.

"The market was getting out of balance," Jim Mellon, chairman of Regent Pacific Group Ltd., told CNBC. "You had the growth of new derivatives, you had a very big increase of direct short selling in Hong Kong, and there weren't offsetting buyers for the Hong Kong market.

"The Hong Kong government was the only large pool of funds available to come in and stabilize," he said.

The question now for Hong Kong is what it plans to do with its significant share holdings. Selling them in the near-term would put more downward pressure on the stock market.

And if the government buys more stocks, Mr. Mellon said, "they will be digging themselves into a rather entrenched position that will become rather awkward and difficult to unwind, with all the conflicts of interests that go along with having a big position in your own stock market."

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