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To: Crimson Ghost who wrote (15935)	8/15/1998 7:30:00 PM
From: Alex	Respond to of 116764

KEEPING COOL WITH CASH How to play defense in Hong Kong ------------------------------------------------------------------------ On the defensive How the Hang Seng has suffered ON AUG. 11, HONG KONG'S STOCK MARKET PLUNGED 3.6% to close at 6,780 points - a five-year low for the Hang Seng Index. Meanwhile, speculative attacks on the local dollar again raised questions about how long the peg to the greenback can last. CHUNG MAN-WING, 34, a director of HSBC Asset Management, oversees the GIF Hong Kong Equity Fund. He was born in the territory and holds a degree from the University of Pennsylvania. Recently, he spoke with Correspondent Andrea Hamilton about his hometown's prospects: In your opinion, why has Hong Kong tumbled from grace? Since early last year, valuations have run well up to an unsustainably high level. The correction itself did not surprise us. What did was the speed of the Asian contagion's spread into this part of Asia: Hong Kong, China and Taiwan. Within Hong Kong, some of the policy responses and measures have not been quite up to market expectations. That resulted in unintended negative implications on asset prices and investor confidence. What do you think the chances are that China will decide to devalue the renminbi? All this is linked more to perception than fundamentals. The official renminbi weight will hold in spite of pressure from high-risk premiums. It doesn't have to devalue, and it doesn't have to go through what Asian currencies have been through. But if the yen does not do well, the worries will continue - and that will be reflected in high interest rates and high risk premiums associated with Hong Kong assets. If the dollar peg were to go - and this is not our view - that could even be positive, going by economic theory. If we de-peg the dollar at a reasonably low exchange rate, exporters and manufacturers will benefit; local service industries will benefit. Prices will come down and render Hong Kong a cheaper place. Interest rates could then stabilize and may even slide when foreign investors begin to flow in. We are not predicting the dollar is going to be de-pegged. At this moment, it is really more an issue of politics, as well as of confidence. What are you investing in? We have had to reduce our holdings in property, banking and China-related "red chip" companies. By the third quarter last year, a lot of red chips were trading at ridiculous valuations. With or without the currency turmoil we had become very cautious. We went defensive and moved into utilities - China Light and Power, Hongkong Electric, that kind of thing. We also bought one or two exporters, companies that manufacture in China but export to Europe. We have also kept cash at a higher-than-normal level; at the moment, we're running the maximum percentage of cash - in the mid-teens. But we're operating in a very volatile market situation. Really, the choice is quite limited. Hong Kong has been driven by assets: property, banks, financial services. What is your medium-term outlook? Frankly, I don't know. Unfortunately we have not seen the worst. We will see more problems - rising unemployment and an erosion of consuming power - during the second half of this year. Our best hope is that the market will be allowed to function freely so asset prices and unit labor costs can adjust in the way they should, allowing Hong Kong to become cheap again so portfolio investors will consider the territory once more. But I don't think this is a scenario we will see anytime soon. Is the government learning from mistakes? The investment community has been quite disappointed. But there are signs of improvement: communication, flow of information channels are improving. Yet in spite of recent improvements, we would like to see a more approachable policy arm. Do you have a wish-list of policy prescriptions to address the situation? We should start looking at ways to bring in foreign liquidity. There have been a lot of measures aimed at improving domestic liquidity. They are not wrong, but with the contraction in economic activity and banks being extremely cautious, the lending of money has plunged. Liquidity is down to very low levels. If we provide a more stable operating environment and maintain the currency board system, the high interest rates will be with us for some time. But maybe it will improve the market mechanisms and we could use the high rates as an incentive for foreign investors - and bank on other factors such as the continuation of the fair rule of law, for example. Then high interest rates would attract foreign liquidity. This of course is not going to be the scenario for next week or next month. The worst thing would be for Hong Kong to follow in the footsteps of our neighbors and go into denial, which would be totally self-defeating. Clearly that will be the end of Hong Kong. But that is not what we are seeing. Given current conditions, what is your fallback safe holding? Right now, with equities what they are, my favorite would have to be cash. pathfinder.com