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Mishi Saran

IT is one of those little ironies that 1998 is the Year of the Tiger in the Chinese lunar calendar.

  While some of Asia's so-called economic tigers might become extinct or tamed beyond recognition, a trapped Hong Kong looks nervously over its shoulder at the local currency's peg to the US dollar.

 To be sure, Hong Kong appears positively perky compared to food riots in Indonesia and popular calls for President Suharto to buzz off, but dinner table conversations all over the territory about torturous interest rates and transferring savings into US dollars attest to deep-seated jitters over a potential collapse of the peg.

 'People do worry about the peg. What happens if it goes can be very nasty,' OCBC Securities head of research Desmond Cheung said.

 Economists believe Hong Kong's 14-year old peg at HK$7.80 to the US dollar has been a lifeline of support and a pillar of confidence in uncertain times, but largely deprives the Government of any monetary tools for economic adjustment - except for raising interest rates.

 And the Government has raised interest rates with aplomb and alarming regularity.

 Assurances have been repeatedly given by Financial Secretary Sir Donald Tsang Yam-kuen and mainland central bank governor Dai Xianglong, that the local dollar and the yuan will not be devalued.

 Economists agree dropping the peg would be a very bad idea, for the time being. They paint a richly varied picture of doom should the peg go, but all agree that more than anything else, the main casualty would still be that fragile thing - confidence in Hong Kong.

 'There would be a massive loss of confidence in Hong Kong. It would become a cross between Macau and Hainan island,' W.I. Carr chief economist Michael Taylor said. 'A lot of what Hong Kong is and does wouldn't work without confidence.'  The loss of confidence would result in a massive capital flight, they unanimously predict.

 'Foreign investors would launch a large scale capital flight and suffer huge losses,' DBS Securities economist S.W. Chu said. 'It's difficult to calculate . . . the huge capital outflow, decline in property prices and decline in all investment assets will be comparable to the Mexico crisis in a worst case scenario.'  One economist who asked not to be identified said the collapse of the Hong Kong dollar peg to the US currency had harmful implications for Latin America, eastern Europe, the Japanese yen and the US dollar itself.

 'The best way to destroy an economy is to destroy its currency . . . you could have world financial disorder,' he said.

 Few economists dared to pin down how much the Hong Kong dollar would be devalued should the peg evaporate.

 'After a currency has been devalued, people don't know where the new level will be and there is a one-way bet against the Hong Kong dollar: you sell Hong Kong dollars and buy US dollars, everybody will be doing that, it's the obvious short,' Cresvale Far East analyst Craig Stephen said.

 He predicted a level which could trigger a peg collapse.

 'We see long term support on the Hang Seng Index at 5,430 points. That [breach] may be the trigger but whether interest rates come down after that is questionable,' he said.

 Economists believe it all depends how much pain Hong Kong can put up with, as far as company failures, unemployment and property slumps go.

 Defaults on mortgages may start ringing alarm bells, but so far the government has shown it is willing to raise interest rates as high as needed.

 Beijing too, was likely to back the peg, at least until the yuan was fully convertible, some said.

 'If Hong Kong has a purpose, it's to act as a financial centre for China - it has major geopolitical strategic importance for China, which needs to have a plausible and convertible currency,' Mr Taylor said.

 'The yuan will be convertible, eventually, until then, China will keep the Hong Kong dollar peg. The interests of Hong Kong's middle class is not the issue, and before the yuan is convertible, you need a plausible banking sector.'  Beijing would probably take a highly cautious view on full convertibility, Nava SC Securities Hong Kong and China chief economist Pan Ming said.

 'Last year, China made the yuan convertible on its current account. For full convertibility they are taking a cautious schedule and particularly with the currency turmoil in the region, full convertibility could have a devastating effect on the economy,' he said.

 Some economists worry that a devaluation of the yuan would put pressure on the Hong Kong dollar peg. But others believe the likelihood of that happening is very small.

 'China has a huge trade surplus, even with the slowdown in exports this year there will be a surplus,' he said. 'The FDI [foreign direct investment] inflow is healthy and there is no reason for the renminbi to devalue. It's impossible for the yuan to depreciate.

 'The question is not economics. There is no reason to devalue the yuan. From a political perspective, the leaders have made it clear the yuan will not devalue.'  Beijing has a long way to go to reform its moth-eaten state banking and enterprise sector, both prerequisites for making the yuan fully convertible.

 So at least for now it appears the peg is safe. But what happens next year, or the year after that is an entirely different question and depends partially on how long it takes Asia's whimpering tigers to lick their wounds.



Stability in mainland dictates peg must stay