City & Business: Not even China can buck the markets
Sunday 16 August 1998
In rhetoric reminiscent of Malaysia's Mahathir Mohamed, Hong Kong's Financial Secretary, Donald Tsang, announced that he'd used a big chunk of his reserves on a one-day buying spree to support the Hong Kong stock market.
"We do not tolerate attempts by speculators to manipulate our interest rates by engineering extreme conditions in the money markets so that they can benefit from short positions they have built up in Hang Seng index futures," he was quoted as saying triumphantly. He must have felt pretty pleased with himself, for his buying helped push Hong Kong's bombed-out index up 8.5 per cent. But that was before traders knew the identity of the buyer. I doubt they'll think so highly of it now they know what's going on is Chinese nationalisation.
On one level, Mr Tsang is absolutely right to complain. When an economy seems to be in trouble international speculators (for which read Anglo Saxon traders) flock round the situation like bees round a honey pot - their object to make money out of it - and in so doing they generally make the malaise infinitely worse.
But there is usually good reason for the vultures to swoop in this way. In Hong Kong's case, it's not much to do with the underlying fundamentals of the economy, which unlike most areas of the Far East are still relatively sound. It is, however, pure fantasy to think that Hong Kong can remain immune to the financial and economic meltdown going on all around it. And yet that's what the authorities out there seem to think it can do. As everyone else, Japan included, devalues like topsy, Hong Kong sticks to the currency board which maintains its dollar peg.
Just as the recession in Britain in the early 1990s was compounded by our membership of the European Exchange Rate Mechanism, the effect of the dollar peg cannot be other than deeply recessionary. That's why the Hong Kong stock market has been falling so precipitously. For speculators it's become a two-way bet. If Hong Kong abandons the peg for the sake of its economy, they make money out of the devaluation. If it doesn't, they make money out of the falling stock market.
For politicians, as well as many ordinary people, this process is bound to seem repugnant, but unless Hong Kong declares UDI from the rest of the world, global capital markets will have their way.
The irony of Mr Tsang's "solution" is that it should run so counter to the capitalist ways that were for so long the colony's life blood and chief source of wealth. It shows that the Chinese don't really understand what Hong Kong or the free market is about. I dread to think what they'll do when they find out, probably as soon as Monday, that Mrs Thatcher was right - you can't buck the markets.
Catching Asian flu
IT'S BEEN long in incubation, but Asian flu is finally beginning to strike home in the United States too. I've recently returned from the US and I can report that there's been a quite tangible change of mood among Wall Street investors over the last two weeks. Irrational exuberance is finally giving way to rational caution and we know not yet where it will lead. US exports are down and so is corporate earnings growth. Meanwhile, the Asian meltdown has caused economic growth to slow to a snail's pace.
Most worrying of all, the US stock market is heading south at a rate of knots. Since it is partly the feeling of wealth generated by the US stock market boom which has helped sustain US spending and economic activity, the consequences of this could be quite dramatic.
That Wall Street is dangerously overvalued has been obvious for at least a year now. But despite the warning signs, including last autumn's 550 point one-day fall in the Dow, small investors have continued to pour money into the US stock market, fuelling a further 18 per cent climb in the market from the beginning of the year to its peak on 17 July. Academics and pundits have become steadily more ingenious at rationalising the irrational.
First it was the new economy, the belief that a combination of technology, clever management and the competitive pressures of globalisation had enabled America to abolish the business cycle. When that began to look a little incredible, it was the new investor. To explain why retail investors, as well as companies through share buy-backs, were prepared to continue buying at such ludicrous prices, pundits said it was because the "equity premium" had fallen - the premium investors require for the risk of investing in equities.
There's now a huge volume of research and literature on this, but the truth is that it's just a poncey way of saying the blindingly obvious - that equities are much more highly valued than they were but that investors are still prepared to buy them. There's nothing new in this; it's as old as the hills and it is to do with the fact that if the stock market keeps rising, people begin to believe it can do so forever.
The last month has sorely tested this belief. Since its peak, the Dow is off 10 per cent, which is already half the 20 per cent fall that officially marks a bear market. I don't know how long it will take, but there's now a real danger that America's Goldilocks economy of high growth and low inflation will end up getting eaten by the bear, too. The only question is whether it will be baby, mummy or daddy bear.
His own worst enemy
MICHAEL GREEN, chairman of Carlton Communications, is his own worst enemy. I gather he's perplexed and angry about the way his already underperforming share price was hit last week by BSkyB's announcement of an aggressively priced package of digital television channels, the view being that if Sky can offer more for less than Carlton's jointly owned pay- TV operation, ONdigital, then ONdigital is pretty much dead in the water.
That view is ill informed. Actually, prospects for ONdigital are still excellent. But whether or not that's the case, it shouldn't be affecting Carlton's share price.
For Carlton, ONdigital is an upside punt. If it doesn't work out, the shares have enough to sustain them from Carlton's established, profitable businesses.
Yet somehow or other Mr Green fails to get this across to the City, which has always been faintly suspicious of Carlton. This is mainly down to the fact that Mr Green is still perceived as more of a tycoon than a conventional chief executive, serving the wider interests of shareholders.
He perhaps ought to do something about that image.
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