Asian Governments Risk Ruin to Prop Up Economies
It’s a measure of the rising frustration among some Asian governments that they have begun fighting their economic crisis with a strategy that hardly anybody in the world thinks will work: using public funds to buy stocks in a bid to shore up their plunging markets.
In pitting government bureaucrats against professional traders, the practice is liable to deplete vital national assets, undermine legitimate investors and even encourage dirty dealing across the region, critics say.
“Once governments get involved, there’s always a danger of corruption, especially if the government’s role is not clear,” said Connie Leung, senior Asia economist with Lehman Bros. “Also, if they’re manipulating the market, investors may turn away since they can’t assess the fair market value.”
Last week, the Hong Kong Monetary Authority broadly intervened in the territory’s equity and futures markets as part of its battle to “punish speculators” and safeguard the link--or peg--between its currency and the U.S. dollar.
Malaysia then got into the act when its mercurial prime minister, Mahathir Mohamad, announced Thursday that his nation also was considering the use of government funds to prop up Malaysian shares, an echo of past threats by Malaysia and Taiwan.
These steps are being driven by Asia’s deep, yearlong economic crisis. Japan, meanwhile, has spent huge sums in the Tokyo stock market the past few years to shore up Japanese bank balance sheets just before March 31, the end of the fiscal year.
Taken together, these cases signal a far greater willingness by some Asian governments to actively intervene in an area of the economy that would be considered off limits in the United States and many Western countries.
In addition to the urgency surrounding the crisis, analysts attribute this to a greater acceptance among some Asian nations of government managing the economy. In the United States, there is neither a mechanism for public funds to be diverted into stocks nor political sentiment to allow it.
Proponents of intervention--or “price-keeping operations,” as the Japanese call it--concede that it’s not an ideal solution but say in some cases the end justifies the means.
“PKO is a necessary evil in order to maintain Japan’s financial system” and prevent a wave of bank failures and related social problems, independent Japanese economist Shigeo Watanabe said. “[Americans] must think PKO is a strange practice, but they cannot criticize Japan for doing so,” he added. “Because if the Japanese economy collapses, they will be hit too.”
But if used extensively and without clear objectives, stock market intervention risks squandering national savings, health and welfare funds and private retirement money, experts say.
Short-term intervention often raises share prices for only a few days before the effect of weak fundamentals drives prices back down. Longer-term measures may entail throwing increasing amounts of good money after bad.
Japan’s intervention in late March, designed to boost the Nikkei stock average above 18,000, is a case in point. Despite untold millions pouring into the market--at one point officials threatened to inject as much as $10 billion--the index actually fell by month’s end to 16,268.83 from 17,000 at the beginning. And five months later, it’s fallen a further 8%, to close Monday at 14,988.36, down 309.84 points.
While Japan doesn’t reveal its stock purchase activities--officials from finance and related ministries Monday denied the practice--economist Watanabe calculates that the government has spent $91.5 billion supporting stocks since 1992.
In Hong Kong, which also refuses to disclose its spending, the Hang Seng index rose by as much as 8% a day last week and rose again Monday as the government accelerated its stock purchases. Analysts, however, question whether this rise is sustainable unless Hong Kong is willing to devalue its currency.
All of this maneuvering involves more than mere funny money. Intervention can exact a very real cost on ordinary citizens, because one of the first places governments often turn to when looking for money to buy shares is public pension funds or savings plans under government control.
The Japanese government has under its direct control a staggering $380 billion, or 30% of all Japanese private savings, through postal savings and other funds, compared with a minuscule amount in the United States.
“If stock prices fall, the accumulated pension funds lose value,” said Tetsuro Sugiura, chief economist with Fuji Research Corp. “This ultimately burdens taxpayers and hurts future beneficiaries, at the cost of one or two days of temporary effect.”
Analysts say the cost of pursuing market-supporting measures in crisis-battered countries such as Malaysia, which has about $20 billion in foreign reserves, may be far higher than in places such as Hong Kong, which has about $95 billion.
Another danger for Asian governments in the months ahead, should they continue propping up stocks with public funds, is that the exercise masks market signals important for a turnaround. This can also scare away legitimate investors.
In Hong Kong, for instance, investors reportedly had trouble last week figuring out where the government’s role ended and “real” demand-supply forces began. While a skidding market can be very painful for those holding assets, falling prices signal in economic terms that assets may still be overvalued. Interrupting such adjustments may simply prolong a nation’s crisis, since investors can’t identify the real bottom.
“In Hong Kong, this (indicates) a reluctance of authorities to allow the domestic market to adjust to its competitive level,” said Jonathan Hazell, Singapore-based Asian strategist with Barclays Capital. “Supporting assets shouldn’t be done, particularly when it’s politically motivated.”
In some cases, intervention may even fuel corruption and undermine open markets. The threat here is that powerful local companies or cronies may be driving the policy, a particular danger given that corrupt ties among governments, banks and companies in some countries may have contributed to Asia’s meltdown.
A spokesman at the Hong Kong Monetary Authority, meanwhile, said the buying spree isn’t aimed at driving up prices artificially nor does it distort the market. Rather, it’s a way to correct a market that’s overshot its fundamentals.
Hong Kong is not avoiding any necessary economic adjustment, he said, as evidenced by stock and property markets that have fallen more than 50% since last year. “It’s not a measure to prop up the market, but rather to drive out speculators,” he said.
But speculators may get the last laugh since they know the government can’t keep buying forever. In this multibillion-dollar cat-and-mouse game, many wait until the correction to take their profits.
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