Anniversary in Hong Kong : Exchange’s Bash Is Crashed by a Bear

The sumptuous feast here Monday night was billed as a birthday party, but it could just as well have been a wake.

Never mind that the courses at the first anniversary banquet for the Hong Kong Stock Exchange had been given such fanciful names as Wealth and Treasure (suckling pig and goose), Pearl and Jade (abalone and broccoli), and Eternal Stability and Prosperity (minced taro and beans).

Stability and prosperity were the farthest things from guests’ minds on Monday night. A gut-wrenching free fall on the Hong Kong Stock Exchange that day had sliced stock prices by 33% and roiled financial markets around the world. Another tumble was averted Tuesday--and the market recovered somewhat--but only after the Hong Kong government and a group of banks doubled the size of a $250-million fund that they had established Sunday to bail out the battered Hong Kong futures market.

This week’s uproar came on the heels of a four-day trading halt last week that locked Hong Kong shareholders into their investments and triggered a round of criticism against the overseers of Hong Kong’s stock market. Many said the closing had wounded Hong Kong’s standing as an international financial center.

Monday’s panic, which spread from Hong Kong’s relatively small stock market to such large financial centers as Tokyo, Sydney, London and New York, is another sign of how instantaneous communications have revolutionized world financial markets.

“We don’t know in any sense whether we’ve yet emerged from this situation,” David Nendick, Hong Kong’s secretary of monetary affairs, said at a press conference Tuesday evening. He predicted that aftershocks from Monday’s panic would be felt for weeks or months to come and that several stockbrokers in Hong Kong and other financial centers will fail.

“I have no idea how many,” he said, “but I think (the problem) is containable.”

Already, stockbrokers in Hong Kong were complaining about bounced checks from insolvent customers and colleagues, and market participants agreed with Nendick’s prediction of a wave of bankruptcies.

Ordered Arrest

At the center of the storm is 58-year-old stock exchange Chairman Ronald Li, a flamboyant and fiery tempered man who is credited by many with unifying Hong Kong’s four rival stock exchanges last year. Just this month, Li triumphantly toured the United States, promoting Hong Kong’s exchange as a good place to do business. Now, however, he is clearly in the bunker, taking criticism from investors and market commentators for his decision to close Hong Kong’s exchange last week.

On Monday, Li shocked journalists at a press conference by jabbing his finger at an offending questioner and ordering his arrest. “This is slanderous!” Li declared when the reporter questioned the legality of the stock market shutdown. “Charge him,” the stock exchange chairman ordered his subordinates. “Take him to the police station! Take him to the police station!” The reporter beat a hasty retreat from the room.

“There is a lot of emotion flying around,” noted Howard Gorges, executive director of Sun Hung Kai Securities Ltd., Hong Kong’s largest local brokerage firm.

“A crash of this magnitude reverberates very quickly, especially in a place like Hong Kong,” agreed Christopher I. C. Jackson, assistant director of the Hong Kong government’s department of trade. “You’ve got 6 million people packed into a very small area, and all of them are highly attuned toward making money.”

‘Time to Gamble’

The pursuit of money in Hong Kong traditionally takes two forms: the hard work that has transformed this colony from an economic backwater 40 years ago into a major manufacturing center for textiles, toys and electronics--and gambling. Hong Kong’s predominantly Cantonese people are notorious for their love of such games of chance as mah-jongg, lotteries, horse racing and, of course, stock speculation.

“In this town, people don’t invest: They gamble,” said Michael Chugani, a columnist for the English language Hong Kong Standard. For Hong Kong Chinese, he noted, money can make the difference between being able to emigrate or living under the communists when Britain relinquishes control of Hong Kong to China in 1997.

“Now is the time to gamble,” Chugani said in an interview Tuesday. “There’s this widespread feeling that there are only 10 years left. If they don’t make money--big money--they won’t be able to get out when the time comes.”

Still, Hong Kong’s immediate economic future looks good. Order books are bulging, unemployment is low to non-existent, and the gross national product is expected to spurt by at least 11% this year after averaging 7% growth during the past 10 years. Hotel rooms are virtually impossible to find on short notice this time of year, and new skyscrapers appear to be going up on every available plot.

“All the indications at the moment are that people are investing very heavily in Hong Kong,” said Jackson of the trade department.

“It is important to recall that the fundamentals have not changed,” Secretary of Monetary Affairs Nendick said Tuesday. Nendick said his advice to investors is: “Sit it out.”

Housecleaning Demanded

But despite the soothing words, others here noted that the worldwide recession predicted by many could hurt Hong Kong’s export-driven economy by drying up demand in the United States and Europe. America accounts for about 36% of Hong Kong’s trade.

Moreover, foreign investors will be wary of Hong Kong’s stock exchange because it was the only market to shut down last week in the wake of the New York Stock Exchange collapse. “Certainly, the fact that the market was closed here when the others were open is to Hong Kong’s detriment,” said Timothy Moe, a manager at Jardine Matheson Securities Ltd. here. “People will be a bit more cautious about coming in. Hong Kong’s reputation has been damaged.”

Indeed some local players are demanding a thorough housecleaning at the stock market--starting with the controversial Li. Rumors abound that he allegedly ordered the market shutdown last week to minimize his own personal losses in speculative futures trading. Li has denied this, although last weekend he resigned as vice chairman of the Hong Kong Futures Exchange as part of the government-organized rescue package.

It is the futures market, where investors bet on the future direction of stock prices, that has taken the brunt of Hong Kong’s financial crisis. On Tuesday, 45 of the 100 active members of the exchange were suspended from trading because they couldn’t meet their obligations or were insolvent, according to Reuters News Service.

But others said that speculation has been getting out of hand in the stock market as well. Many here point to the proposed stock market listing of Club Volvo, a nightclub that specializes in providing female companionship to businessmen on expense accounts. It is also an enterprise in which Li owns a minority stake.

Not All Persuaded

Indeed, a glowing article in a stock exchange publication extolled the Club Volvo’s “brisk business,” and noted that “all seats are filled every evening” and that “everyone who goes to Club Volvo is an important customer prepared to spend money like water.”

Such promotional touting would never be permitted on U.S. stock exchanges, which are strictly regulated by the Securities and Exchange Commission. Li, however, denies that he has any conflict of interest and defends the morality of Club Volvo’s business. “The enterprise is not a brothel, but encourages customers to negotiate for private services from its 1,000 well-turned-out young hostesses. We are living at the end of the 20th Century, not in Victorian times,” Li said at Monday’s press conference.

But not all market watchers are persuaded by Li’s explanations. Wrote South China Morning Post Business Editor Steven Leather in a scathing column on Monday: “Mr. Li and his friends have done little to lose their ‘Mickey Mouse’ image. It cannot be long before they are seen with big ears and whiskers.”