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
ebooksA special investigation by Andy McSmith
  • Get to the point
Latest stories from i100
Have you tried new the Independent Digital Edition apps?
Independent Dating

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

iJobs Job Widget
iJobs Money & Business

Ashdown Group: Editor-in-chief - Financial Services - City, London

£60000 - £70000 per annum + benefits : Ashdown Group: A highly successful, glo...

Guru Careers: Pricing Analyst

£30 - 35k (DOE): Guru Careers: We are seeking a Pricing Analyst with experienc...

Ashdown Group: Treasury Assistant - Accounts Assistant - London, Old Street

£24000 - £26000 per annum + benefits : Ashdown Group: A highly successful, glo...

Ashdown Group: Sales Team Leader - Wakefield, West Yorkshire

£21000 - £24000 per annum: Ashdown Group: The Ashdown Group has been engaged b...

Day In a Page

Revealed: Why Mohammed Emwazi chose the 'safe option' of fighting for Isis, rather than following his friends to al-Shabaab in Somalia

Why Mohammed Emwazi chose Isis

His friends were betrayed and killed by al-Shabaab
'The solution can never be to impassively watch on while desperate people drown'
An open letter to David Cameron: Building fortress Europe has had deadly results

Open letter to David Cameron

Building the walls of fortress Europe has had deadly results
Tory candidates' tweets not as 'spontaneous' as they seem - you don't say!

You don't say!

Tory candidates' election tweets not as 'spontaneous' as they appear
Mubi: Netflix for people who want to stop just watching trash

So what is Mubi?

Netflix for people who want to stop just watching trash all the time
The impossible job: how to follow Kevin Spacey?

The hardest job in theatre?

How to follow Kevin Spacey
Armenian genocide: To continue to deny the truth of this mass human cruelty is close to a criminal lie

Armenian genocide and the 'good Turks'

To continue to deny the truth of this mass human cruelty is close to a criminal lie
Lou Reed: The truth about the singer's upbringing beyond the biographers' and memoirists' myths

'Lou needed care, but what he got was ECT'

The truth about the singer's upbringing beyond
Migrant boat disaster: This human tragedy has been brewing for four years and EU states can't say they were not warned

This human tragedy has been brewing for years

EU states can't say they were not warned
Women's sportswear: From tackling a marathon to a jog in the park, the right kit can help

Women's sportswear

From tackling a marathon to a jog in the park, the right kit can help
Hillary Clinton's outfits will be as important as her policies in her presidential bid

Clinton's clothes

Like it or not, her outfits will be as important as her policies
NHS struggling to monitor the safety and efficacy of its services outsourced to private providers

Who's monitoring the outsourced NHS services?

A report finds that private firms are not being properly assessed for their quality of care
Zac Goldsmith: 'I'll trigger a by-election over Heathrow'

Zac Goldsmith: 'I'll trigger a by-election over Heathrow'

The Tory MP said he did not want to stand again unless his party's manifesto ruled out a third runway. But he's doing so. Watch this space
How do Greek voters feel about Syriza's backtracking on its anti-austerity pledge?

How do Greeks feel about Syriza?

Five voters from different backgrounds tell us what they expect from Syriza's charismatic leader Alexis Tsipras
From Iraq to Libya and Syria: The wars that come back to haunt us

The wars that come back to haunt us

David Cameron should not escape blame for his role in conflicts that are still raging, argues Patrick Cockburn
Sam Baker and Lauren Laverne: Too busy to surf? Head to The Pool

Too busy to surf? Head to The Pool

A new website is trying to declutter the internet to help busy women. Holly Williams meets the founders