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SCMP Reporter

IN this week of surprises, there was nothing to match the events that took place on Thursday.

 Tung Chee-hwa, making his most detailed comments on the Government's decision to intervene in the stocks and futures market, also spoke with unqualified gloom about the short-term outlook for the Hong Kong economy.

 'We are having a very difficult time. Our second quarter GDP growth . . . will be negative,' he told his audience. 'The third quarter and the fourth quarter will be very, very difficult and I think the difficulties will go well into next year.'  A very depressing message heralding a recession and one that, under normal circumstances, would have hammered the market.

 But as if to dramatically highlight that these are not normal times and that something fundamentally changed in Hong Kong during the proceeding four trading days, the market bolted ahead a further 1.57 per cent.

 Pushing this index's rise were further sharp price increases by companies facing the hardest times for decades, nursing deteriorating loan books and facing huge declines in profitability.

 Quite clearly, fundamentals had nothing to do with the market's advance.

 They departed the equation the previous Friday when the Government launched the intervention and drove prices up 8.9 per cent.

 With this departure went Hong Kong's claim to the title of one of the world's most open and free markets. We now have a market that operates freely when things are on the up but when the pain starts to really hurt commitment to laissez-faire principles is suspended.

 This will be the message being transmitted around the world and no amount of justification will erase the impression in foreign markets that Hong Kong has repeated the error of its neighbours and attempted to buck the markets.

 Malaysia is one of these neighbours that attempted and failed in its bid to reject market forces. It must therefore have come as cold comfort to the Hong Kong Government when Prime Minister Mahathir Mohamad offered his ringing endorsement of the SAR's action and a lecture on how it should have heeded his advice.

 The same Hong Kong Government officials who last week were justifying the intervention late last year derided Malaysia's crude interventionism.

 So what has happened to cause this historic about-face? After all, this 'double play' between the currency and equities market, identified by the Government as the source of unjustifiable profits for speculators seeking to break the peg, is an old game.

 In the absence of a satisfactory explanation for the timing and reasoning behind the action, rumours have run riot.

 The last thing the markets need is heightened uncertainty, and to date the Government's intervention has added to nervousness rather than allayed it.

 We are left with artificial market conditions and scant evidence to suggest speculators have departed. Suggestions that some hedge funds have been burnt might be true, but these boys collectively have deep pockets - deeper even than Joseph Yam and his billions.

 Every signal from the Government indicates the intervention was taken from a position of weakness, not strength.

 These are ideal circumstances for speculation and a breeding ground for hedge funds activity.

 Having embarked upon this high-risk strategy the Government can ill afford to blink. However, Hong Kong's reputation can ill-afford the strategy.



High-risk intervention strategy puts SAR's reputation on the line