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Technology Stocks : C-Cube -- Ignore unavailable to you. Want to Upgrade?

To: BillyG who wrote (24285)	10/23/1997 8:02:00 PM
From: John Rieman	Read Replies (1) \| Respond to of 50808

Hong Kong's stand.................................... FridayÿÿOctober 24ÿÿ1997 Monitor Maintaining peg discipline worth the pain when facing the abyss SIMON PRITCHARD For a few terrifying moments yesterday afternoon, it seemed Hong Kong's financial system was about to implode, threatening the savings and economic aspirations of an entire generation. Naked fear gripped trading desks and even world-weary veterans of previous panics saw their careers flash before their eyes. By the close, we had apparently looked into the abyss but stepped back. A crisis played out elsewhere in the past few months engulfed Hong Kong in the twinkling of an eye. Little more than a stray comment by business leader James Tien Pei-chun provided the apparent trigger. What followed was carnage, as stock prices lost 1,211 points and overnight interest rates hit 250 per cent. Investors face a Faustian bargain: do they believe the pegged currency system will hold? If so, at what price for the local economy and asset markets? International investors took Mr Tien's comments as a sign of weakening local resolve. Facing lost competitiveness from regional devaluations the business lobby seemed to be embracing the soft option of floating the currency. Against them was the commitment and immensely strong hand of the Hong Kong Government. The currency board system is a self-regulating mechanism that, policed correctly, should be impregnable. Most potently is US$88 billion of foreign exchange reserves committed to defence at all costs. When investors sell Hong Kong dollars for foreign currency, the money supply shrinks and interest rates rise. Short selling becomes ruinously expensive, and the incentive to hold Hong Kong dollars increases. Weighing in yesterday, the Hong Kong Monetary Authority crushed inter-bank liquidity and forced up short-term interest rates, putting a vicious squeeze on speculators shorting the currency. With interest rates ruinously high, many speculators will be nursing wounds after the exchange rate broke the previously inviolate upper limit of $7.7250. Yet the battle may be far from over. The prize for forcing a devaluation is huge, with an immediate currency collapse. So why endure such pain? Quite simply the alternative is too frightening to contemplate. Without the security of the peg, flight capital threatens a meltdown in property prices, triggering a spiral of mortgage defaults and bank failures. Hongkong Bank's decision to cease early termination of local currency time deposits provides technical support in tightening monetary conditions but more potently imposes effective capital controls, keeping Hong Kong dollars onshore. While a realignment of the currency system is likely during the next two years doing so now is profoundly dangerous. Given capital withdrawal from Asia and uncertainty in major markets speculators would be offered a one-way bet. The Government seems willing to accept a potential US dollar economy rather than abandon the peg. Accepting a long period of high interest rates would hurt property prices and reduce economic growth. Bad though that may be, it is, however, unlikely to induce a banking crisis. While no new administration wants to preside over a recession there may be a silver lining. Imagine 18 months of controlled economic pain reducing property prices, office rents and filtering through to lower wage growth. In short, an economy competitive once more. Beijing has competing interests. A collapse in the currency would be a huge embarrassment. But having set off on the course of privatising state-owned industry it needs buoyant equity markets to facilitate fund raising. Given those aims, will it be prepared to sit out a long period of asset deflation in Hong Kong? Such are the political and economic imperatives that investors must consider this morning. As world markets fall into the vortex a small local crisis in Southeast Asia may yet trigger a far bigger crisis. Given that threat, the motivation for sticking with the peg discipline should not be abandoned easily, whatever the pain. Local officials would do well to go beyond their normal statements of support and state our vital economic interest in unequivocal terms. E-mail Simon Pritchard at Pritch@scmp.com