september 12, 1998
2 Asian Economies Seek to Keep Global Markets at Bay
By MARK LANDLER
ONG KONG -- When Hong Kong and Malaysia placed curbs on their stock markets last week, the outcry from foreign investors was immediate and indignant. The governments were committing heresy, these critics said, by turning their backs on the free market in the search for a quick economic fix.
But Hong Kong and Malaysia are not playing to an international audience. They are struggling to ease the pain of a punishing economic downturn on their people. In these straitened times, when people are more worried about getting by than going global, building walls around some Asian markets has become an increasingly attractive way of holding the economic typhoon at bay.
As emerging markets from Brazil to Russia tumble into crisis, Asia's isolationist tendencies are alarming senior U.S. officials and could set a profoundly dangerous precedent for the global economy.
"We could have an unraveling of the global capital markets if the countries that opt out do better than the countries that stick to the orthodoxy," said Paul Krugman, a professor of economics at the Massachusetts Institute of Technology.
Most major Asian countries still operate reliably open markets. But as the regional financial crisis sinks into a prolonged recession, it has shaken the faith of many here in the free-market system.
"It's no longer writing on the wall," said Donald Tsang, the financial secretary of Hong Kong, who banned certain types of stock trading and ordered a big government intervention in the stock market late last month. "People have begun to close up. Look at our Malaysian friends."
On Sept. 2, Malaysia discontinued trading in its currency, the ringgit, and imposed sweeping capital controls on its markets. Among the provisions: currency held outside Malaysia will become worthless in a month; foreign investors cannot withdraw their capital for a year. Some analysts said Malaysia had effectively checked itself out of the global economy.
Hong Kong's approach was quite different. Rather than close off its markets, it plunged into them with a ferocity that left investors slack-jawed. Between Aug. 14 and Aug. 28, the government spent an estimated $15 billion to buy shares in an effort to prop up the stock market. It also passed new regulations that restrict the short-selling of stocks and rein in the free-wheeling futures market.
Unlike Malaysia, Hong Kong's currency is still fully convertible, and there are no restraints on moving capital in or out of the territory.
Still, Malaysia and Hong Kong have a common complaint: the global market -- with its sharp-eyed speculators and will-o'-the-wisp capital flows -- is causing too much pain. With their stock markets crashing, unemployment soaring and currencies under attack, these governments feel they can no longer give foreign investors carte blanche in their markets.
"We're seeing a general loss of patience with trying to satisfy the international marketplace," Krugman said. "International investors demand a lot, and it's starting to look like these countries can't do it while rebuilding their economies."
The appeal of capital controls is that they enable governments to pursue economic policies -- such as lowering interest rates -- that might be untenable in an open market. Malaysia slashed rates after its intervention, giving an immediate lift to its stock exchange. If it had tried that when the ringgit was convertible, it almost certainly would have led to a further devaluation.
With Indonesia, Thailand, and South Korea suffering from similar ills, such a strategy might be appealing to their governments as well. One significant complication is that these countries are receiving loans from the International Monetary Fund, which favors open markets. But Krugman noted that Russia was getting IMF loans, even though it had suspended trading of the ruble.
Krugman has been both an observer and a player in the recent debate over free markets in Asia. In an article in the last issue of Fortune magazine, he proposed capital controls as a way for Asian countries to gain breathing space in order to repair their economies.
Scarcely a week after Krugman's article appeared, Malaysia's prime minister, Mahathir bin Mohamad, announced his country's new restraints. Krugman disavowed responsibility for Malaysia's action, but advisers to Mahathir said the Fortune article lent a veneer of academic respectability to the move.
"The whole thrust is that in extreme circumstances, government intervention is kosher," said Noordin Sopiee, chairman of the Institute of Strategic and International Studies, a research organization in Kuala Lumpur, which helped draft Malaysia's new regulations.
Meddling in the markets is nothing new in Asia, or in much of the rest of the world, for that matter. Japan and South Korea have both intervened in their stock markets, while Taiwan imposes a modest form of capital controls. China maintains capital controls and a nonconvertible currency. But as Asia's growth exploded in the 1980s, most of the countries in the region adopted at least the semblance of a free market.
And why not? In 1996, Thailand, Indonesia, Malaysia and the Philippines enjoyed a net capital inflow of $96 billion from foreign investors. Outposts like Hong Kong and Singapore became gleaming financial centers by promoting their hands-off governments and open markets.
Today, Noordin acknowledged, "the prevailing ideology is that you must not touch market forces."
U.S. officials are rushing to reassert the free-market standard around the world. Lawrence Summers, the deputy treasury secretary, said in a speech in Washington on Wednesday: "It would be a catastrophe if countries were to develop the idea that somehow withdrawing from the global system was right, and that building the right foundation for a market economy was wrong."
Malaysia has come under withering criticism from foreign investors, who say that its controls will scare off investment, retard economic reform and end up hurting the very people they were supposed to protect.
"Capital controls are like heroin," said Mac Overton, a fund manager at MBF Unit Trust in Hong Kong. "Once you get addicted, it's hard to get off."
Overton was equally critical of the Hong Kong government, which he said had artificially inflated the stock market by buying so many shares. Moreover, he said the government had imposed voluminous rules and regulations, which made day-to-day investing in Hong Kong an uncertain affair.
"How do I know they're not going to change the rules again?" said Overton, who said he had sold all his Hong Kong investments.
The economist Milton Friedman, who is a self-described fan of Hong Kong, said the government's intervention was a "crazy idea."
"Hong Kong has essentially undermined its reputation as a financial center," Friedman said in a telephone interview from his office in Stanford, Calif. "It cannot remain a financial center if it manipulates its stock market."
Tsang acknowledged that Hong Kong's intervention had alienated some of its staunchest supporters. But he said the government had little choice but to act because the former British colony was under attack by a cabal of foreign hedge funds. In what he called a "double play," Tsang said the hedge funds speculated, in succession, against the Hong Kong dollar and the stock market.
Since the Hong Kong dollar is linked to the U.S. dollar at the fixed exchange rate, the brunt of the attacks was absorbed by the stock market, which dropped 16 percent in the first two weeks of August.
"The attack was sustained and professional, and we believed that if we did not do anything about it, the consequences would be calamitous," said Tsang, who will meet with investors in the United States and Europe later this month to reassure them of Hong Kong's commitment to an open market.
Hong Kong's buying spree lifted the stock market out of the doldrums, though it surrendered much of its gains this week. The benchmark Hang Seng index declined 3.5 percent Friday to close at 7,578.48.
The long-term consequences of the campaign are potentially thorny, however. Hong Kong spent $15 billion of its $96 billion in foreign reserves to buy stocks. And it is now the largest shareholder in several of the territory's leading companies, including Hongkong and Shanghai Banking Corp. It is unclear how the government can sell off these holdings without depressing the market.
For all that, the government has been widely supported by the people of Hong Kong. A recent survey commissioned by The South China Morning Post showed that economic confidence was rising and approval ratings rose sharply after the intervention.
"The government cannot let it get worse and worse," said Shee Leng Leng, a 29-year-old homemaker. "How do you define a free market? Nobody will regard Hong Kong as a free market if it becomes too bad."
In Malaysia, officials said capital controls would give the government the chance to repair the economy. They said such repairs would be impossible if Malaysia continued to be buffeted by sudden outflows of capital or speculative attacks on its currency.
"Our belief is that the international currency trading system has gone stark raving crazy," Noordin said. "Making a rapid rush for a tranquil harbor was a wise course. There seemed to be no alternative."
But outsiders are skeptical that Malaysia will reform its debt-laden banking system or tackle endemic corruption without pressure from the global market.
Mahathir's capital controls are a logical extension of his past practice of blaming foreign currency speculators for the economic collapse. Officials point to a rise in the Kuala Lumpur Stock Exchange as evidence that Mahathir's policies are striking a chord with the public.
Appeals to nationalism are not limited to Malaysia. In Hong Kong, which prides itself as the multicultural hub of Asia, the debate over government intervention has taken on a distinct us-versus-them tone, with officials and legislators repeatedly drawing a line between local "investors" and foreign "speculators."
For his part, Tsang sought to dispel any notion that Hong Kong was blaming outsiders for its economic ailments. "We love foreign investors here," he said emphatically. "It's a bit unfair to tar my name with some other foreign leaders who might have different notions."
|
