Morgan Stanley managing director Peter Churchouse drew hoots and laughter from a crowded conference room of financial professionals yesterday when he forecast the Hang Seng Index would hit 16,000 by the end of this year. Last year, Mr Churchouse had called for 28,000 points on the index by the middle of next year. A few houses are still calling for similar sharp rises in the index by year end but yesterday's audience clearly had doubts that the benchmark would recover to those levels seen in the middle of last year. Despite his bullish call, Mr Churchouse warned of the problems that could lie ahead for Hong Kong and other markets, namely major debt defaults and the risk that Beijing could devalue the yuan. 'If China devalues, the asset deflation in Hong Kong will be even more severe,' he told an Asia Society's seminar on the regional crisis. A yuan devaluation would set off another round of currency selling in the region. With Beijing staring at a huge unemployment problem and a need to keep growth strong, the pressure to devalue and export its way out of current overcapacity problems was great, he said. He believes, however, that certain mitigating factors will stay Beijing's hand. Mainland leaders would have to consider the inevitable backlash from Washington and the devastating impact a devaluation would have on Hong Kong. 'If China is seen to be driving Hong Kong to the wall so soon after the handover, what will the world think?,' he asked. While Mr Churchouse believes that Beijing will take a longer-term view of the current crisis and not take a short-term, self-serving step such as devaluation, he warned that the risk remained. SBC Warburg Dillon Read director Simon Ogus said: 'When China sees its neighbours playing Russian roulette with five bullets in every chamber, the idea of being the only one left standing must have some appeal.' In a worst-case scenario, Mr Ogus said that Western banks could demand that Asian companies repay every cent of the debt they took on, while central banks in the region ignored the advice of the International Monetary Fund and printed money to reflate their economies. Germany was forced to meet an impossible debt repayment schedule after World War I and the result was hyperinflation and World War II.