Hong Kong’s Hang Seng Plunges in Massive Sell-Off
Another Asian domino began to teeter on Wednesday, as the Hong Kong stock market came under blistering attack by sellers concerned about rising interest rates and the specter of currency devaluation.
At the same time, the new stock offering of much-hyped China Telecom, which began trading in New York on Wednesday, was a flop, falling from its offering price of $30.50 a share to close at $28 a share on the New York Stock Exchange.
Both market developments threatened to set a sour tone for Chinese President Jiang Zemin’s visit to the United States next week.
In Hong Kong, the benchmark Hang Seng share index tumbled to its lowest level since Sept. 26, 1996, losing 764.33 points, or 6.1%, to close at 11,637.77.
The decline was the biggest ever in points and the biggest one-day percentage fall since March 1996.
Real estate stocks were responsible for almost half the index’s decline, as a key short-term interest rate among banks surged 1.54 percentage points to 10.61%. That event increases borrowing costs and threatens to damage the local property market, long one of the world’s most expensive.
The Hong Kong dollar’s value has seen moderate erosion in recent weeks--fallout from the devastating currency devaluations in most southeast Asian nations since June. And investors were apparently alarmed this week after neighboring Taiwan abandoned the idea of defending its currency and instead let it drop.
In London on Wednesday, Hong Kong Chief Executive Tung Chee-hwa insisted that the government would defend the Hong Kong dollar’s value and keep it pegged to the U.S. dollar--even if that requires higher interest rates to entice investors to stay put.
But the prospect of higher rates terrifies local and foreign investors in Hong Kong.
“In the short term,” said Christina Cheung, a director at RBC Investment Management (Asia) Ltd., “Hong Kong’s authorities will face a lose-lose situation. If they keep on defending the currency peg, interest rates will rise, and that will hurt the stock market, the economy and the property market. If they don’t defend the peg, there will be capital flight, and the impact will also be disastrous.”
Ironically, Tung’s government has made clear that it believes the local property market is too hot and needs to be deflated to keep Hong Kong--an already extremely high-priced real estate market--from becoming noncompetitive against its regional rivals.
“If another bubble is going to be popped in Asia, it will probably be the Hong Kong real estate market,” said Mark Headley, money manager at Matthews International Capital Management in San Francisco.
But Richard Farrell, London-based manager of the Guinness Flight China & Hong Kong stock mutual fund, noted that “once you start the process [of pricking a bubble], you’re never quite sure how far the values will fall.”
That concern pounded property companies and the banks that lend to them on Wednesday.
Putting further pressure on the market, U.S. brokerage Morgan Stanley, Dean Witter’s global strategist, Barton Biggs, announced that he has slashed his Asian stock holdings.
“I visited Asia predisposed to thinking there must be some value in the ashes of the destruction that occurred there, but now I believe a vicious cycle is at work on the downside,” he said in a report to his sales team on Tuesday.
Many other fund managers have followed Biggs’ lead, which is reflected in the stock market and currency crashes in Singapore, Malaysia, the Philippines and Indonesia since June. Global investors have reevaluated those economies’ outlooks amid rising trade deficits, growing debts and weak banking systems.
Meanwhile, the immediate sell-off in China Telecom when it began trading in New York on Wednesday portends rough going when it opens in Hong Kong today.
The Chinese mobile phone company, the largest initial stock sale ever held in Asia outside Japan, was viewed by many portfolio managers as overvalued when its price was set last week.
“We didn’t bother to seriously look at it,” Headley said.
Nonetheless, investment bankers were able to sell $4 billion worth of the stock. That could come back to haunt them today if the Hong Kong shares tumble along with their New York-listed counterparts.
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Steep Drop
Hong Kong’s Hang Seng stock index has plunged in recent days as investors worry about rising interest rates and currency devaluation. Monthly closes and latest:
Wednesday close: 11,637.77
Source: Bloomberg News
