City & Business: Not even China can buck the markets

SO THE running dogs of capitalism have been thwarted. Or have they? I can think of few things in financial markets more foolish or pointless than what Hong Kong's new Chinese masters attempted to do with the former colony's stock and futures markets on Friday.

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.

Start your day with The Independent, sign up for daily news emails
PROMOTED VIDEO
ebooks
ebooksA special investigation by Andy McSmith
Latest stories from i100
Have you tried new the Independent Digital Edition apps?
Independent Dating
and  

By clicking 'Search' you
are agreeing to our
Terms of Use.

iJobs Job Widget
iJobs Money & Business

Recruitment Genius: Software Development Manager

£40000 - £50000 per annum: Recruitment Genius: This is an exciting opportunity...

Ashdown Group: Product Manager - (Product Marketing, Financial Services)

£30000 - £35000 per annum + Benefits: Ashdown Group: Marketing Manager - Marke...

Recruitment Genius: Compliance Assistant

£13000 per annum: Recruitment Genius: This Pension Specialist was established ...

Ashdown Group: Market Research Executive

£23000 - £26000 per annum + Benefits: Ashdown Group: Market Research Executive...

Day In a Page

As in 1942, Germany must show restraint over Greece

As in 1942, Germany must show restraint over Greece

Mussolini tried to warn his ally of the danger of bringing the country to its knees. So should we, says Patrick Cockburn
Britain's widening poverty gap should be causing outrage at the start of the election campaign

The short stroll that should be our walk of shame

Courting the global elite has failed to benefit Britain, as the vast disparity in wealth on display in the capital shows
Homeless Veterans appeal: The rise of the working poor: when having a job cannot prevent poverty

Homeless Veterans appeal

The rise of the working poor: when having a job cannot prevent poverty
Prince Charles the saviour of the nation? A new book highlights concerns about how political he will be when he eventually becomes king

Prince Charles the saviour of the nation?

A new book highlights concerns about how political he will be when he eventually becomes king
How books can defeat Isis: Patrick Cockburn was able to update his agenda-setting 'The Rise of Islamic State' while under attack in Baghdad

How books can defeat Isis

Patrick Cockburn was able to update his agenda-setting 'The Rise of Islamic State' while under attack in Baghdad
Judith Hackitt: The myths of elf 'n' safety

Judith Hackitt: The myths of elf 'n' safety

She may be in charge of minimising our risks of injury, but the chair of the Health and Safety Executive still wants children to be able to hurt themselves
The open loathing between Barack Obama and Benjamin Netanyahu just got worse

The open loathing between Obama and Netanyahu just got worse

The Israeli PM's relationship with the Obama has always been chilly, but going over the President's head on Iran will do him no favours, says Rupert Cornwell
French chefs get 'le huff' as nation slips down global cuisine rankings

French chefs get 'le huff' as nation slips down global cuisine rankings

Fury at British best restaurants survey sees French magazine produce a rival list
Star choreographer Matthew Bourne gives young carers a chance to perform at Sadler's Wells

Young carers to make dance debut

What happened when superstar choreographer Matthew Bourne encouraged 27 teenage carers to think about themselves for once?
Design Council's 70th anniversary: Four of the most intriguing prototypes from Ones to Watch

Design Council's 70th anniversary

Four of the most intriguing prototypes from Ones to Watch
Dame Harriet Walter: The actress on learning what it is to age, plastic surgery, and her unease at being honoured by the establishment

Dame Harriet Walter interview

The actress on learning what it is to age, plastic surgery, and her unease at being honoured by the establishment
Art should not be a slave to the ideas driving it

Art should not be a slave to the ideas driving it

Critics of Tom Stoppard's new play seem to agree that cerebral can never trump character, says DJ Taylor
Bill Granger recipes: Our chef's winter salads will make you feel energised through February

Bill Granger's winter salads

Salads aren't just a bit on the side, says our chef - their crunch, colour and natural goodness are perfect for a midwinter pick-me-up
England vs Wales: Cool head George Ford ready to put out dragon fire

George Ford: Cool head ready to put out dragon fire

No 10’s calmness under pressure will be key for England in Cardiff
Michael Calvin: Time for Old Firm to put aside bigotry and forge new links

Michael Calvin's Last Word

Time for Old Firm to put aside bigotry and forge new links