Around Asia's markets: Assets tied to dollar bear brunt of decline
Bloomberg News
March 21, 2005
Darren Boey 

Hong Kong, Malaysia and China are Asia's worst-performing stock markets this year, and all three have their currencies pegged to the U.S. dollar. Bich Pham, a fund manager at TAL Global Asset Management in Hong Kong, believes this is more than a coincidence.
 
"Where's the incentive to put the money into markets like Hong Kong?" said Pham. "A market like South Korea should be more attractive if the currency is forecast to improve."
 
The U.S. dollar has fallen against Asian currencies like the South Korean won, adding to international investors' profits as stocks rise and cushioning them against any losses. Markets with dollar pegs have dropped as Morgan Stanley Capital International's Asia-Pacific index, a regional benchmark denominated in dollars, has added 2.2 percent.
 
In Hong Kong, the Hang Seng index has declined 3.2 percent amid concern that the de facto central bank is going to follow the U.S. Federal Reserve by raising interest rates. Real-estate companies including Henderson Land Development and lenders like Bank of East Asia are leading the retreat.
 
In China, the Shanghai Composite index has dropped 3.1 percent and the Shenzhen Composite has slipped 2.1 percent. In Malaysia, the Kuala Lumpur Composite has fallen 1.5 percent, the only other loss among Asian markets included in global indexes.
 
The Kospi in South Korea, the best performer among Asia's 10 largest stock markets, has risen 13 percent in dollar terms. The U.S. currency's decline against the won has accounted for four percentage points of the benchmark's advance.
 
Pham has more South Korean shares in his funds than are represented in benchmark indexes. His holdings include Samsung Electronics and Hyundai Motor.
 
Samsung has climbed 14 percent this year in dollar terms, while Hyundai has added 1.1 percent. In won terms, Samsung has risen 9.9 percent and Hyundai has dropped 2.5 percent.
 
The dollar's weakness "would be a big factor for some investors, like hedge funds," said Geoff Lewis, the Hong Kong-based head of investment services at JF Asset Management, which holds $57 billion of mostly Asian assets.
 
"New money coming into the region is going to look at the way the U.S. dollar has failed" to rally, he said.
 
Under a pegged-currency system, a country's central bank buys or sells in foreign-exchange markets to keep the local currency at or near a specified value.
 
Hong Kong's dollar has been officially valued at 7.8 to the U.S. currency since 1983, and China has pegged the yuan at 8.277 since 1995. Malaysia's former prime minister, Mahathir bin Mohamad, fixed the ringgit at 3.8 to the dollar in 1998 to curb currency speculation during the Asian financial crisis.
 
Stocks related to China and Malaysia rose in last year's second half as speculation mounted that the central banks would allow their currencies to appreciate, bolstering returns on assets denominated in yuan and ringgit.
 
The Hang Seng China Enterprises index, consisting of 38 mainland companies listed in Hong Kong, and the Kuala Lumpur Composite gained 11 percent in the half. The Hang Seng rose 16 percent.
 
Since then, such speculation has eased. China's government has said it needs to bolster the banking system, burdened with $438 billion of bad loans, before letting the yuan trade more freely. Nevertheless, a change may come "unexpectedly," Prime Minister Wen Jiabao told reporters in Beijing on March 14.

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