Government intervention worries investors
The Stock Exchange of Hong Kong marks its 12th anniversary in a period of extraordinary market volatility. The movement of the Hang Seng Index since the middle of last year has reflected the changing investment environment and expectations about its immediate future.
At yesterday's closing, the index stood at 8,840.01 points, down about 50 per cent from its record high of 16,673 set on August 7 last year, but far above the 2,000 level first reached in September 1986.
Apart from the dramatic fall in the market over the past year and the collapse of several brokerages, the most significant event for the exchange was the entry of the SAR Government as a direct player.
The Government began buying blue-chip stocks in early August in an attempt to frustrate a prevalent trading strategy involving shorting the Hong Kong dollar to put upward pressure on interest rates and take profit in the futures market. The Government action would 'hit them where it hurts', the Hong Kong Monetary Authority chief executive, Joseph Yam Chi-kwong, said.
As the August futures expiry date approached, more money was put into the stock market. Government buying reached its peak on August 28. As world markets reeled from panic selling in the wake of the Russian rouble's collapse, the Government continued to buy. By the end of the day, a new daily turnover record had been set: $79 billion. Although details of the Government's share portfolio have not been released, it is believed to have cost more than US$10 billion.
A new management company has been set up to manage the portfolio and some of the blue chips concerned can look forward to having a government representative sitting on their board of directors.
One question raised by the intervention is how the Government can be seen as a fair regulator of companies in which it is a major shareholder? Criticism has come from overseas. US Federal Reserve chairman Alan Greenspan said: 'I think it would be mystery to find that I think that the efforts on the part of the Hong Kong authorities to try to jack up their stock market was a wise effort.
'One, I don't think it can succeed. And, two, I think that the consequences of doing that erode some of the extraordinary credibility that the Hong Kong monetary authorities have achieved over the years.' Bob Broadfoot, managing director of the Political & Economic Risk Consultancy, said the intervention 'has thrown into doubt the Government's commitment to maintaining a laissez-faire system. If the Government maintained its shareholdings, it would have difficulty being seen as a fair, disinterested regulator of strategic industries such as telecommunications. If it decided to unload them quickly, the resulting fall in prices could be unpalatable.
'Either way, because the Hong Kong Government distorted the markets movements in August, it must also distort the market again if it ever wants to unwind its positions.'
