Bear Market in Hong Kong Brings Desperate Measures

Asia's financial crisis continues to shake up the US stock market, and a possible measuring stick of Asian troubles came last week from Hong Kong.

Imagine if US Treasury Secretary Robert Rubin and Federal Reserve Chairman Alan Greenspan got together and decided to spend taxpayer dollars to buy shares of General Motors, Chrysler, Coca-Cola, Microsoft, IBM, and a host of other blue-chip companies - all in a bid to make the stock market move higher.

That is what happened in Hong Kong - government intervention in a financial market once considered the world's freest.

The government says it is not trying to prop up the stock market, down about 60 percent over the past year. Rather, it wants to drive away currency speculators, whom it accuses of "manipulating" the markets and earning "unacceptable profits."

"I'm going to hurt [the speculators]," said Joseph Yam, chief executive of the Hong Kong Monetary Authority, the region's de facto central bank. "I'm going to hit them where it hurts and tell them 'Don't come here and make a lot of money by playing our futures market.'"

The government here broke with a long tradition of non-intervention in the markets on Aug. 14, when it aggressively bought the shares.

That day, the market's main barometer, the Hang Seng Index, roared 8.5 percent. One of every 3 blue-chip stocks racked up double-digit gains. And throughout last week, the government continued its intervention to support share prices.

The new approach worries many observers.

"I think this is at a huge cost to our reputation as one of the world's financial centers," Martin Lee, head of Hong Kong's Democratic Party, said. "Now instead of the government being a regulator, the government is a player and a very key player."

Mark Mobius, president of the Templeton Emerging Markets mutual fund worries that when a government starts making value judgments, such as the number and type of shares to buy, "the temptation for corruption multiplies."

Still, Mr. Mobius and others say they understand the pressure the markets put on the government.

"There was a spiraling panic developing in Hong Kong, particularly in the stock and property markets, and something had to be done," says Jim Mellon, chairman of the Regent Pacific investment fund .

Hong Kong is reeling from the worst recession in more than 15 years, and many here, including the government, feel speculators have aggravated the situation with a trading scheme almost guaranteed to make them money.

"The scheme is so simple," says one analyst, "Hong Kong has been like an ATM machine for these speculators. They just push the right buttons and money comes out."

First, the speculators put selling pressure on the Hong Kong dollar, which is pegged to the US dollar at a fixed rate.

Then they position themselves to profit if local stock prices fall.

The move against the Hong Kong dollar, for technical reasons, forces the government to raise interest rates. And those higher interest rates cause a sell-off on the stock market.

The speculators collect profits, and Hong Kong suffers from higher interest rates and less stability.

Analysts are divided over the effectiveness of government intervention. Many say it will stabilize the market for the short term. But it is less clear if it will drive away speculators.

"They raise the stakes so high," says Prof. K.C. Chan of the Hong Kong University of Science and Technology. "If this fails there will be tremendous damage to Hong Kong and to the credibility of the government."