Hong Kong Stocks Plunge in Massive Sell-Off

Another Asian domino fell today, as the Hong Kong stock market came under blistering attack by sellers concerned about soaring interest rates and the specter of currency devaluation.

The benchmark Hang Seng share index tumbled 1,382.25 points, or a stunning 11.9%, to 10,255.52 by late morning, in what traders said was the worst one-day point decline ever.

The index had slumped 6%, to 11,637.77 on Wednesday, as worries over interest rates and currency movements mounted.

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 on the New York Stock Exchange.

The shares, which today began trading in Hong Kong for the first time, also slumped there in the early part of the session.

The Hong Kong market’s dramatic decline, which some money managers said could easily continue in coming weeks, threatens to set a sour tone for Chinese President Jiang Zemin’s visit to the United States next week. The plunge will also be an important challenge for the Chinese leadership, which now, in effect, controls Hong Kong.

Meanwhile today, Hong Kong’s turmoil slammed other Asian markets, most of which have already crashed in recent months. Malaysia’s main stock index dove another 4.4% in early trading, Singapore’s index was off 5.2% and Tokyo’s Nikkei-225 index sank 2.2%.

The apparent catalyst for today’s decline: the Hong Kong government’s insistence that it will defend the value of the Hong Kong dollar, even though virtually every other Southeast Asian country--and, early this week, Taiwan as well--have reluctantly allowed market forces to slash their currencies’ values in recent months.

In London on Wednesday, Hong Kong Chief Executive Tung Chee-hwa declared that the government would not let the Hong Kong dollar fall, but rather would keep it pegged to the U.S. dollar--even if that requires higher interest rates to entice investors to stay put.

Sure enough, early today short-term interest rates rocketed in Hong Kong, with some key rates hitting 50%, up from 11% on Wednesday. Local banks raised their prime lending rates to 9.50% from 8.75%.

“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 stocks of property companies and the banks that lend to them today.

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 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.

As currencies decline, foreign investors rush to sell local investments to avoid seeing their holdings automatically devalued.

But that selling can further hurt the currencies, sparking a downward spiral.

Meanwhile, the sell-off in China Telecom is likely to be an embarrassment for the Chinese government--and for the company’s investment bankers.

The Chinese mobile phone company, whose initial stock sale was the largest 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 now.

For their part, Hong Kong officials tried to put the best face on things today. “If there is selling in the Hong Kong dollar, interest rates will naturally rise,” said Antony Leung, an advisor to Tung on financial issues and managing director of Chase Manhattan Bank.

“But I don’t believe the situation will last long.”

Strangely, the Hong Kong dollar was holding up well this morning--even as stocks crumbled.

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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