Outlook: Hong Kong

THE Hong Kong Monetary Authority is so perturbed by Western criticism of its extraordinary decision last month to intervene in the stock market that it yesterday held a press conference in London to explain itself.

For the record, it seems that buying up ten per cent of some of your leading companies in an attempt to prop up a flagging stock market does not equate to a departure from free market principles. What's more spending billions of dollars in doing so - the HKMA declines to detail exactly how much was spent - is not a waste of your citizens' money, but a "good investment", notwithstanding the fact that Hong Kong is in the grip of a ferocious bear market.

And finally, recent attacks on the Hong Kong dollar have nothing to do with underlying weaknesses in an economy that is in the centre of the Asian turmoil. It is all simply an attempt by those latter-day villains - the currency speculators - to bleed the Hong Kong economy dry.

Yes, it's easy to mock the official line, which is no more convincing after yesterday's briefing than it was before. There is, none the less, a serious debate to be had over whether financial markets have been as much a cause of the calamity that has engulfed the Far East and other emerging markets as a symptom of it.

Financial markets invariably overshoot, both on the upside and the downside, and the effect of this is usually greatly to enhance the boom in the real economy and its subsequent bust. When things are going well, the exchange rate and stock market soar to unsustainably high levels before falling back to a more realistic value. Similarly, when things look as though they are going badly, exchange rates fall through the floor. In the Far East, a massive inflow of foreign capital was followed by an equally massive outflow. No economy could survive such a reversal of the tide unscathed.

So the free market model does have some serious drawbacks; less clear is what should or can be done about it. Policy makers in Hong Kong believe short-term intervention might counter this over-shooting phenomenon.

The trouble is that this assumes that central bankers are a better judge of the "fair" value of their own exchange rates and stock markets than the international financial community. Markets may be poor at setting exchange rates, at least in the short-term. But history suggests that governments are a good deal worse.