Bobby if Russian debt is cancelled (the correct word would be Restructured) what would stop China to devalue yuan...
Hong Kong Plans to Restrict Stock, Futures Trade After Govt Buying Spree
Hong Kong Plans to Restrict Stock, Futures Trade (Repeat) (Repeating to fix typographical error in second paragraph.)
Hong Kong, Aug. 28 (Bloomberg) -- Hong Kong will propose curbs on stock and futures trading after spending US$12.5 billion -- 13 percent of its currency reserves -- to hold back waves of selling in the city's equity market and safeguard its currency.
By impeding investors' ability to trade, Hong Kong -- home to Asia's second-biggest stock market after Tokyo -- threatens to diminish the flow of money into its market and the rest of Asia at a time when raising new capital is vital to shoring up companies, banks and entire economies throughout the region.
The government's move also could threaten Hong Kong's own economic future -- and rob it of a chance to capitalize on the financial crisis that has crippled Japan's banks and left its stock market at a 12-year low. If investors shun the former British colony's capital markets, that could also make it much tougher for China to raise the foreign capital it needs to stoke its slowing economy and bolster its debt-burdened banking system.
Government intervention ''really destroys the reason for investing in Hong Kong,'' said Tim Tuttle, a managing director at Newport Pacific Management in San Francisco and money manager for the $650 million Colonial Newport Tiger mutual fund. ''It's a dangerous ploy. We're in uncharted waters here,'' he said.
Hong Kong Financial Secretary Donald Tsang gave few details about the possible controls, which would break with the government's hands-off approach to its economy. He suggested the government may step back from the markets it began supporting two weeks ago, a move that could send the Hang Seng Index plummeting on Monday, traders said.
Tsang claimed victory in the government's battle to hurt those betting against stocks and the Hong Kong currency, among the last in Asia still tied to the U.S. dollar. He didn't rule out buying stocks again. ''After the episode in the past two weeks, we stand ready to operate in the stock and futures markets whenever speculators again engage in a similar double-play,'' Tsang said. He said the government would hold the stocks it bought as a long-term investment.
What Now?
If Hong Kong does pull back, the Hang Seng Index is likely to tumble as much as 15 percent on Monday, some fund managers said. Today alone, Hong Kong bought almost HK$58 billion (US$7.5 billion) of stock -- its largest purchases yet -- to hold back a wave of selling.
Many fund managers said the battle isn't over. ''The government is stuffed,'' said Marc Faber, the founder of Marc Faber Ltd., which manages about $500 million, mostly for wealthy Asian clients. ''What can they do now?''
After Hong Kong markets shut, Tsang said the government would propose new laws to restrict short selling and stock borrowing, which enable people to bet against stocks. He said it was in the public's interest to do so. ''We're just sick of this,'' Tuttle said of the Hong Kong market's slide and the government's intervention. ''We have a serious problem. The Hong Kong government intervening in the market makes people exceptionally nervous. Sell orders are lined up on all the brokers desks'' waiting to be executed if conditions deteriorate further, he said. ''What the investment managers have said is, 'I'm not going to try and figure it out, I'm just going to sell.' Everybody is just ducking and covering,'' said Tuttle.
Opening Up
Over the past few years, Hong Kong gradually allowed investors to borrow and short a greater number of stocks.
Even before short selling was allowed, stock trading here could be volatile. In 1989, when tanks rolled into Beijing's Tiananmen Square, for example, the Hang Seng plunged about 25 percent in a day.
Today, the Hang Seng Index fell 1 percent as the government stood virtually alone in buying on the exchange's busiest day ever.
From the moment trading began, the HKMA bought HSBC Holdings Plc, Hong Kong Telecommunications Ltd. and other benchmark stocks in a bid to support the Hang Seng Index.
The government probably accounted for three quarters of today's record HK$79 billion of trading. That total was more than 10 times the daily average for the past three months and easily eclipsed the old record of HK$46 billion, set last August.
For all the government's buying, the Hang Seng Index fell 93.23 to 7829.74.
The government now owns about US$12.5 of stock, or about 6 percent of the entire Hong Kong market, traders said.
Hong Kong has spent almost 13 percent of its currency reserves -- the world's third-largest -- to buy stocks and safeguard the Hong Kong currency's 15-year-old link to the dollar. The Hong Kong Monetary Authority has about $84 billion left.
Some money managers are adopting unprecedented strategies to cope with the government's new policy.
Newport Pacific, for example, on Wednesday hedged its entire holding of Hong Kong stocks, selling Hong Kong dollars for delivery in three months on the forward foreign exchange market and buying U.S. dollars. The move cost the fund one percent of its value, but is regarded as a cheap insurance policy by management. ''We've never done that before,'' Tuttle, who continues to pare the number of Hong Kong stocks he holds in Colonial Newport Tiger fund. Today, he holds 34 Hong Kong stocks, down from 36 in June and 48 in June, 1997.
Bears Unbowed
So far, both the government and stock-market bears appear unbowed. Hong Kong may face an uneasy standoff for weeks or even months, and the government may wind up owning the stock it buys for years, some traders said.
When Hong Kong may scale back its purchases, or worse, begin to sell, is now the biggest question for stock-market investors here.
With the proposed changes, Hong Kong's central bank ''is trying to get rid of speculators, and what they're really doing is getting rid of investors,'' said Graham Neilson, an economist at Banque Paribas in London.
Officials ''are caught between a rock and a hard place. Either they let the market go, and it gets completely hammered, or they put in capital controls and take away the reasons'' Hong Kong succeeded in the first place, he said.
If Hong Kong kept buying stocks at its current pace -- averaging more than US$1 billion a day since it began on Aug. 14 -- the government would exhaust its remaining $86 billion of currency reserves by January. That figure excludes currency reserves held in mainland China.
If Hong Kong bows to pressure and lets its currency weaken, investors based in other currencies will lose money. Hong Kong interest rates, though, would probably decline and in all likelihood stocks would rally. ''How is the government going to unwind such a huge position,'' said Kent Rossiter, institutional sales manager at Nikko Securities Co. (H.K.) Ltd.
Two weeks in, the government now ranks among the largest shareholders of HSBC, Hong Kong Telecommunications and other benchmark companies.
Such purchases flew in the face of Hong Kong's traditional hands-off approach to its markets and economy. The government said it is committed to free markets and that there is no conflict of interest in having the city's banking regulator buy bank stocks.
Some investors say that isn't so.
For some, Hong Kong government's decision to plow into the stock market and then restrict trading a little more than a year after the former British colony returned to China stood old worries on their head. A year ago, some investors were concerned that Beijing -- not Hong Kong -- might meddle in the city's economy and markets.
A cartoon in the today's Hongkong Standard summed up that sentiment. It pictured Hong Kong officials urging brokers to buy stocks, while Chinese President Jiang Zemin stood by. ''I never knew socialism could be this easy,'' Jiang says.
Growing Portfolio
Among other things, the government probably owns more than 130 million shares of HSBC, 575 million shares of Telecom and about 110 million shares of Cheung Kong. HSBC alone accounts for about a third of the Hang Seng Index.
As the government waded into the stock and futures markets again today, the HKMA let borrowing costs rise to make it more expensive for people to bet against stocks and the Hong Kong dollar.
The rate Hong Kong banks charge each other for overnight loans rose to 21 percent from 18 percent, while the rate for three-month loans rose to 14.5 percent from 13.5 percent. The Hong Kong dollar was little changed at 7.7497. The currency is pegged to the U.S. dollar at about 7.8 to one.
When the buying began, HKMA Chief Executive Joseph Yam said flatly that the government was trying to hurt investors who sold stocks short while simultaneously selling the Hong Kong dollar. Those investors were trying to drive up interest rates so stocks would fall and they could profit by buying back shares at cheaper prices.
To some fund managers, though, the unprecedented intervention shows Hong Kong is no longer willing to pay the economic price of keeping its currency pegged to the dollar, as it has been since 1983.
A government report released after Hong Kong market shut today showed the economy shrank 5 percent in the second quarter.
Together with a 2.8 percent contraction in the first three months of the year, that met the textbook definition of recession: Two consecutive quarters in which an economy shrinks.
For the most part, the figures will just confirm what many people already know: This was just the first leg of an economic slump that will run into 1999 or even beyond. Less than a year ago, the Hong Kong economy was growing at an annual pace of 6 percent.
When Hong Kong began buying on Aug. 14, the Hang Seng Index was near a five-year low of 6600. Now, thanks to the HKMA, the index is above 7800.
The index would almost certainly wipe out that 15 percent gain if the government disclosed that it would no longer buy stocks and futures -- and many say growing concerns over economic problems in Russia and recession across Asia could drive it far lower. |
