Outlook: Lessons from Asia in money and miracles
On the implications of the hong Kong crisis for other emerging markets and candidates for Natwest's board
Tuesday 13 January 1998
The currency board system introduced to Hong Kong in the early 1980s has survived worse crises than the collapse of Peregrine, so why should it crumble now? The obvious riposte is because Hong Kong cannot afford to maintain the peg when all around are devaluing with such abandon. But neither could this special administrative region withstand the collapse in international confidence and property values that would flow from devaluation. Hong Kong is damned if it does, damned if it doesn't: damned to recession if it clings to the peg, and to economic oblivion if it dismantles it. Of the two, the former would seem the lesser evil.
Even so, the damage involved in maintaining the peg under present circumstances is obviously bad enough. Part of it is a plummeting stock market, for if the currency cannot respond to the pressures around it, something else has to give.
The biggest danger would appear to be that of recessionary conditions sweeping from Hong Kong into China. That would make present guesses about the damage crisis in the Far East is doing to the world economy look worryingly optimistic. Add to this growing signs in the US of political opposition to the International Monetary Fund's package of aid to the region, and to the top-ups being handed out like confetti by the US, and the situation begins to look very serious indeed.
No wonder policy makers and bankers are looking anxiously around for signs that the contagion sweeping South-east Asia might spread to other emerging markets too. The parallels between Latin America, Eastern Europe, the Indian sub-continent, even Russia, and the stricken economies of the Far East, are obvious and many. In all these regions, growth has been heavily dependent on foreign capital, attracted in by tales of fabulous returns and limited currency risk.
A self-feeding emerging markets industry has developed around the business of directing capital into these regions. European bankers last year became the largest group of lenders to the Far Eastern economies, but what they've sunk into the Pacific Rim is modest compared with Eastern Europe and the former Soviet Union. It is also chicken feed set against US investment in Latin America. There is a danger, then, that the speculative bubble of the Tiger economies is just one of many.
For the time being, Wall Street seems determined to turn a blind eye to this possibility. Fears yesterday that Friday's precipitous plunge in the Dow would turn into a rout were eventually vanquished. And to be frank, Armageddon still doesn't look like the most likely outcome. With luck, the bubble is not yet sufficiently far advanced in Eastern Europe, Russia, India and Latin America to be capable of the damage caused in the Far East.
If so, bankers and investors should count themselves lucky, for they now at least get the chance to learn some lessons. One of these is that Eldorado doesn't exist; there is very little that is miraculous in this world, especially when it comes to money. A second is that capitalism needs to be accompanied by democracy and adequate regulation of financial markets and corporate institutions if it is to function effectively. Nobody in their right mind would think of investing in a company in the developed world which didn't file accounts. Why do they feel so inclined to do so when it comes to emerging markets?
Unfortunately, another aspect of capital is that memories tend to be short - about as long as the next leg of the business cycle to be precise. The Far East may have taught bankers to be wary of other emerging markets but, like earthquakes, there will always be speculative bubbles.
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