High-Wire Assault on Speculation

This, the most open economy in Asia, even the world, is now struggling to escape imprisonment by speculators with a David versus Goliath strategy that has raised eyebrows across the global financial establishment.

Year after year this former British colony tops worldwide rating lists of economic market freedom. But suddenly, leaders here, shaken by coordinated outside assaults on their currency and stock market that have helped jack up business costs and unemployment, are abandoning free-market dogma. Believing that some major negative speculation on its currency is linked to big-time negative betting against its stock market, Hong Kong has begun investing, in a very targeted way, in its own stock market. It is shoring up blue chip stocks that are under assault, while also using its reserves to keep its currency pegged to the U.S. dollar. It is battling speculators who pay to borrow shares and then later sell them, betting on a declining market that will let them buy the shares back at a lower price, pocketing the difference. So the government is betting against the positions of speculators betting against Hong Kong.

No one knows if the controversial tactic will work over the long run, and no government, even one with deep pockets like Hong Kong’s, can afford to pour money into private markets indefinitely. The strategy of trying to out-think the world’s speculators--using government money to drive up stocks and at the same time support currency prices--is certainly bold, and it may well fail. But if it doesn’t, authorities here will be acclaimed as near-geniuses who concocted the first antidote to tame the giant waves of outside speculation exacerbating Asia’s misery.

Governmental currency market intervention by itself is nothing new, of course. But this kind of overt stock-market intervention is. The government here believes the currency can’t be protected if the equities market is in free-fall. It believes speculators are executing a vicious double play that has the effect of cheapening stocks by weakening the currency. Simply shoring up the local dollar won’t be enough if the stock market is left to the wolves. “Intervention in the markets is something everyone here absolutely hates,” says Frank Martin, head of the American Chamber of Commerce in Hong Kong. “But this is a terrible situation.” Says Kwok Chuen Kwok, chief economist for Standard Chartered Bank, one of the largest Hong Kong banks: “What’s happening here and elsewhere in Asia is not the ordinary market condition. We all feel the government should do something.”

Geopolitically, Hong Kong is no big deal, but on the world economic stage it is Exhibit A for capitalism. Its self-imposed test of wills against the speculators was discussed with Beijing and approved by Tung Chee-hwa, the chief executive who took over for Beijing with the July 1997 handover from the British. The gentlemanly Tung is not like pugnacious Malaysian Prime Minister Mahathir Mohamad, who erupts like Vesuvius at foreign speculators every other week. Here is recent Mahathir: “The currency attack is now at dangerous and irresponsible levels. We should not rely on foreigners. Not only do they not want to help, they are also preventing us from restoring our economy. They can chop us to pieces.” Mahathir’s vitriol aside, what’s unfolding is not, of course, a masterful methodical worldwide plot to clean Asia’s clock, but simply a widening opportunity for investors to make wagers that currencies and stocks will fall in value throughout Asia--and reap a windfall.

It is this withering assault by investment and hedge funds betting on continued hard times that has undermined Hong Kong. The stakes are gigantic. Its collapse could prove the last domino--the one that falls just before a general global economic downdraft hits the world. Relatively small though it is, Hong Kong’s economy is Asia’s financial barometer. And Asia is no longer so minor.

What Asia now endures in the outside attack on its currencies was foreseen years ago (though the attack on stocks was not). One academic, in a landmark monograph that’s cited in many an economic textbook, predicted just this kind of one-country-after-another calamity if currency markets were given a totally free hand. The year was 1978. Concluded Yale Prof. James Tobin then: “Speculation on exchange rates has serious and frequently painful real internal economic consequences. Domestic policies are relatively powerless to escape them or offset them.” Hong Kong’s contribution to the puzzle of international economic stability is to draw a link between stock market and currency attacks and attempting to minimize both.

Clearly, governments need to adopt a global view of their responsibilities. The finance ministers of the Asia-Pacific nations should develop the habit of working together as a team. Only this can prevent the Asia-Pacific from being divided and conquered by international hit squads of speculation, always on the prowl to make a killing. It’s the rare small country that has huge reserves like Hong Kong. Yet when small economies, like Thailand’s, get in trouble, eventually everyone in the neighborhood gets hurt. Will such international efforts come into being? Probably not in our lifetime. That’s why Hong Kong has decided to dig in on its own beachhead.

“The manipulators and speculators have been creating chaos,” complains Anson Chan, Hong Kong’s No. 2 leader. Her government is responding with some creative chaos of its own.