Stocks and currencies hit turbulence this week, shaking markets from Peking to Sao Paolo. In London and New York, the impact was limited. But the long-term results could be to shake the faith of developing countries in global capitalism, and undermine stability.
It is 11,000 miles from China to Brazil, a journey half-way around the world from the South China Sea to the South Atlantic. This week, they were suddenly and dramatically connected as markets tumbled, dragging down equities and currencies around the world. A pulse passed around the world, rippling the waters in Victoria Harbour and at Copacabana beach. It was a vivid demonstration of the adage that markets are both global and local: globally connected, but local in their effects.

The last such shockwave was 10 years ago, in a world very different from today. In 1987, there was still a Soviet Union with Mikhail Gorbachev in charge, Germany was divided, and Tiananmen Square was just a square. Since then, a potent mixture of liberalisation, privatisation and market opening has transformed the world economy. This week's events have echoed well beyond the trading floors of Manhattan and the City.

This week's rollercoaster ride began several months ago far from the big money centres, in Thailand, where there were concerns about the banking sector and a bubble economy. It moved swiftly to neighbouring Malaysia, whose Prime Minister, Mahathir Mohamed, attempted unsuccessfully to stem trading against his country's currency by calling the businessman George Soros "an idiot". Currency traders simply carried on betting.

The disease spread to Indonesia, a country that has seen a marked economic slowdown and where widespread forest fires that cast a haze over the region appeared to symbolise the growing crisis.

Then came Hong Kong. In 1987, it was a vibrant market but very much in the third rank. Now, after a decade of breakneck growth, it is in the premier league. It is also part of a country that is nominally still a Communist state, one of the world's more closed economies, and one of the least experienced in the ways of international capitalism. China was suddenly implicated in the politics of the global equity market place.

The record falls on the stock exchange and the speculative pressure against the Hong Kong dollar provided the territory's new sovereign state with its first major challenge. China had to tread the careful line between being supportive and being seen as interventionist, despite its promises of autonomy for its new Special Administrative Region (SAR). The Chinese authorities have been careful to stand aside and let the Hong Kong administration make the running. They are well aware of the risks of doing otherwise: the influential American credit rating agency Standard and Poor's issued a statement yesterday stating that any misgovernance by Peking "could erode the pillars of Hong Kong's credit worthiness".

The message from Peking, echoing reassurance from Hong Kong was that the economy was fundamentally sound, Hong Kong had massive foreign reserves and speculators would get burned if they tried to put pressure on the Hong Kong dollar.

The tornado whirled rapidly on from Hong Kong, hitting Wall Street and the City. Its impact there was limited, leaving both shaken though not fundamentally damaged. But it quickly transmitted itself to every other world market, and in particular to the bourses and currencies of Latin America.

Ten years ago, Latin America was still emerging from painful decades of military rule; it was struggling with the burden of the debt crisis, and most of its economies were still based on the old inward-looking policies of the Seventies. The last few years have seen huge strides, making Latin America one of the world's most exciting investment opportunities. So its governments were at pains to point out that the region's market losses were a result of "Asian flu" and that their economic fundamentals were sound. But market analysts fear the Latin American crisis may now have taken on a life of its own. It is bound to slow growth and possibly weaken currencies through next year.

The crisis has already tarnished the region's image as a relatively secure, high-profit emerging market. "I think there will be lasting consequences of this," said Arturo Porzecanski, Chief Economist for the Americas at ING Barings, New York.

The symptoms of the problem were speculative. "There was a lot of leveraged buying [before this week's crisis]," said Desmond Lachman, head of emerging markets research at Salomon Brothers in New York. "A lot of people were ... borrowing other people's money and setting themselves up for very high returns. When that stops, you get the reverse process. They're selling not because they think the fundamentals are bad. They're selling because they're forced to sell."

But the results could be all-too direct. "That kind of phenomenon, while not real to begin with, could impact Latin American countries if it persists. They're going to have to follow policies that slow their economies down. When they come to raise money next year, they're going to have to pay very much higher interest rates. What they'll do is they'll cut back their needs by following more restrictive domestic policies, maybe higher interest rates, more stringent budgets," Mr Lachman said.

Attention is shifting rapidly to the longer-term problems, and to one country. "In the short term, the panic seems to have gone. Now, people are focussing on particular situations. Brazil has been very much on people's minds," Mr Porzecanski said.

Brazil, the region's largest country, suffered the week's worst stock market losses, with the Sao Paulo stock exchange losing much of the 50 per cent gains it had notched up during the year. The key Bovespa index slid almost 10 per cent on Thursday, a fall five times as steep as that on Wall Street.

Brazilian President Enrique Cardoso, whose ambitious privatisation and strong currency programme has drawn investors from around the world, sought to assure investors the economy was sound and the currency, the real, would not be devalued. But there were widespread rumours during the weeks of problems in Brazil's banks and the Central Bank was reported to have spent at least $10bn of its $62bn (pounds 38.7bn) foreign reserves to prop up it currency.

"Brazil is potentially the magnet for currency speculators," said Mr Porzecanski. "Their biggest hope was to maintain confidence through the privatisation and concessions programme but if the markets don't soon recover, question marks will arise as to the ability to sell those companies and place the new equity in a weak market."

In Hong Kong, too, there are darker shadows. Yesterday, Joseph Yam, one of the highest paid central bankers in the world, swept into the Hong Kong legislature to claim victory on all fronts. Not only had the speculative attacks been fought off, he declared, but the SAR's foreign reserves had risen as a result. Sir Donald Tsang, the financial secretary, was equally triumphant and earlier told legislators that "the market mechanism of natural adjustment" would cut the cost of doing business and strengthen competitiveness.

Businessmen have been considerably more circumspect. James Tien, a legislator, who chairs the powerful Hong Kong General Chamber of Commerce, said he doubted the government's complacent version of events because it ignored the damage which the defence of the local currency was causing to the economy.

There is an uneasy calm, with turbulence lurking around every corner. In these circumstances an element of xenophobia has crept into the debate about why Hong Kong is facing financial problems. China's Liberation Daily had no doubts: "Striking a blow at Hong Kong's financial system through the foreign exchange and stock markets has become a big conspiracy by foreign exchange dealers", it said.

The Liberation Daily, of course, is by no means a representative voice in Hong Kong. But it is the same message as that of Mahathir Mohamed, similar, even, to the new and cautious message of George Soros, once the prophet of global markets, now more concerned about the impact of unbridled capitalism. And these are people with considerable experience of capitalism: for countries that have only emerged into the global market place in the past decade, and which are still unsteady on their feet, this week's rollercoaster ride will have left them feeling distinctly queasy.