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Nervous weekend for world markets
United Press International - October 26, 1997 04:15
%FINANCIAL %ASIA %MARKETS V%UPI P%UPI
By United Press International
Monday could be a decision day for world stock markets: was last
week's setback temporary, or will the slide pick up speed?
The first clue may come from Hong Kong, where the Hang Seng stock
index plunged down 10 percent Thursday, then rebounded smartly with a 7
percent gain Friday.
The Hong Kong sell-off Thursday reverberated around the globe. But
Friday's recovery there did not spread to New York. The Dow Jones
industrial average dropped another 132 points, on top of Thursday's 187-
point tumble. That left the Dow at 7715.41, its lowest level in nearly
two months.
Many analysts said Hong Kong's rebound Friday does not spell
recovery, especially since the U.S. stock market failed to provide
leadership by turning itself around.
Hong Kong's plunge was precipitated when the Hong Kong Monetary
Authority withdrew liquidity from the market, sending interbank interest
rates shooting up 300 percent in order to stave off an attack on the
Hong Kong dollar.
Analysts said the move heightened fears that the government would
stop tying its currency to the U.S. dollar. This prompted panic selling
in many global stock markets.
Allen Sinai, chief economist at Primark Decision Economics said ''the
meltdown in world equity markets during the week had as its catalyst a
giving way of the last Pacific Rim country holdout, Hong Kong.
The economist said, ''It was like a stack of dominoes, with Asia and
Pacific Rim countries falling one-by-one and now collectively toward a
quasi-recession.''
Sinai said ''collapsing business activity, financial squeeze and
crunches in much of Asia are the bust side of the previous long Asian
boom, a big impediment to an already faltering recovery in Japan, and
impose some risks to economic growth, business activity and the earnings
of many U.S. companies.''
Experts said the problem began months ago in Thailand, and spilled
over into Hong Kong, where investors unloaded stocks in a four day
selling binge. Worries centered around the deteriorating economic
prospects for Hong Kong, another Asian tiger whose currency is tied to
the U.S. dollar.
Neighboring Asian currencies including the Thai baht, Malasian
ringitt, Indonesian rupiah and Taiwan dollar have all been devalued
recently, and now currency speculators have turned their attention to
the Hong Kong dollar.
The Hong Kong slide turned into a rout by Thursday, when the Hang
Seng stock index plunged 10.4 percent in value. It has tumbled about 40
percent in the past two months.
Hong Kong's plunge was precipitated when the Hong Kong Monetary
Authority withdrew liquidity from the market, sending interbank interest
rates shooting up 300 percent in order to stave off an attack on the
Hong Kong dollar.
Analysts said the move heightened fears that the government's fixed
exchange rate mechanism with the U.S. dollar was in danger of
collapsing. This prompted panic selling in the many of the global stock
markets.
Economist Sinai said, ''Behind the falling currencies of Asia and
tumbling stock markets is the economic reality of coming declines in
Asian economic activity.''
However, the question is clearly whether Hong Kong authorities will
allow the economy to be damaged to save the currency.
Carl B. Weinberg, chief economist at High Frequency Economics,
explained ''with Hong Kong's current account nearly in balance and
international reserves of $82 billion - second biggest in the developing
world, and not counting China's $123 billion in international reserves -
there is no balance of payments crisis that would advocate a currency
devaluation.''
Weinberg compares Hong Kong's strong position to Thailand, where
''the current account deficit of $14 billion has to be held against
international reserves of $29 billion. This is a problem.''
Experts note that both Hong Kong and its foster parent China have
seen their international reserves rise by a third over last year's
levels.
In contrast, Weinberg said, ''Thailand's reserves have fallen by a
quarter. We are no experts in the economies of this region, but it sure
looks to us as if Hong Kong was correct to defend its dollar and should
succeed in doing so.''
Hong Kong's Financial Secretary Donald Tsang attempted to calm
markets by saying he has the authority to use ''all of the exchange
fund'' if necessary in defense of the Hong Kong dollar's peg to the U.S.
currency.
Tsang said the exchange fund has already been used in defense of the
currency, although he declined to specify how much has been spent.
Hong Kong Monetary Authority chief executive Joseph Yam told the
global community the brunt of the speculative attack was fended off on
Thursday.
Yam said the authority has successfully driven off the speculators
and that since Thursday the government has in fact been buying U.S.
dollars.
Tsang reiterated that the first priority of both the Hong Kong
government and the monetary authority is to defend the Hong Kong
dollar's peg to the U.S. dollar.
However, Edward M. Kerscher, chief financial analyst at PaineWebber
warned ''as was the case in 1995, there is strong concern today that
turmoil in a particular country that spills over into an entire region
will have serious negative implications.''
In 1995, the country was Mexico and the area of concern was Latin
America.
Today the turmoil in Thailand has put the spotlight not only on the
problems of certain Southeast Asian countries, but also on Japan.
Kercher noted Thailand's similarities with Mexico: an overvalued
currency, a large trade deficit and heavy foreign borrowing.
He said: ''As was the case with Mexico when a currency crisis spread
through the rest of Latin America after the Mexican debacle, neighboring
countries such as Indonesia, Malaysia, and the Philippines have also
come under intense scrutiny. They have also experienced stock market
volatility and have been forced to defend their currencies.''
Sinai said ''for the United States, until recently the goings-on in
Southeast Asia did not appear to pose much risk in terms of the reality
of any economic or financial market impacts.''
However, Sinai points out that many U.S. companies, financial
institutions, industries and sectors have increased their risk in the
region.
He said, ''Though no classical recession is likely for the U.S.
economy for many years, the risks engendered by the Asian situation are
the first real worry in a long time for the U.S. market.''
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Copyright 1997 by United Press International.
All rights reserved.
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