THE Chinese papers continued to debate the Government's intervention in the stock and futures markets last week. They also called for a review of the first-time home-buyer loan scheme. Maintaining its opposition to the intervention, the Hong Kong Economic Journal said the Government should withdraw from the markets as soon as possible. The damaging effect of 'psychological warfare' waged by speculators spreading destabilising comments should not be overlooked. If a wave of selling Hong Kong dollar-denominated assets was whipped up, then a careless step in the Government's action to beat off speculators could end up breaking the peg. The Journal was confident of the Government's ability to protect the peg before it intervened in the markets. This was because Hong Kong had a huge reserve, speculators had no easy access to the Hong Kong dollar and those who sold the currency short could be hurt by high interest rates. However, the paper was concerned that the Government's capacity to defend the peg had weakened because some of its reserve had become shares. The Government should now try to reduce its battlefront and concentrate on defending the dollar by strengthening the mechanism protecting the peg. The Oriental Daily was shocked that the Government had used more than $70 billion on Friday to prop up the market, increasing the total amount of funds ploughed into shares to more than $100 billion. Judging from their performance, the paper said it had reason to doubt if officials had sufficient intelligence and knowledge to manage an SAR facing crisis after crisis. It called on the central government not to use its foreign exchange reserves to bet in this losing game and to hire an international panel of experts to help the SAR formulate measures to 'save' the markets. The Hong Kong Economic Times, which supports the intervention, said the Government must realise it would be difficult to buck the worldwide stock market falls. Its strategy in September should not be to prop up the market at all cost; it was best not to intervene. This was because further buying by the Government would only encourage long-term investment funds to unload their shares. Besides, hedge funds which had sold Hong Kong shares short would have to buy shares back to meet their obligations; this buy-back activity would already constitute a substantial buying power. Although the Government would suffer nominal losses if the market fell, this was not important because the shares would return a profit in the long term when the economy recovered. Ming Pao said speculators would find it increasingly difficult to manipulate the markets in future, having failed to win as they had planned. However, the Government had won only at a huge cost. It must now plan other means to maintain order in the markets so that it would not have to deploy large sums of money to intervene again. As long as Hong Kong people did not panic, and maintained their confidence in the local currency, then the peg would not break. The Government should also improve its mechanism to defend the peg and relieve deflationary pressure on the economy, said the paper. Sing Tao Daily News reported the Financial Secretary's forecast that the economy would shrink by about four per cent this year. Unless there were other unpredictable variables, Hong Kong's economy had nearly bottomed. Provided the Government continued to adopt ameliorating measures and expedite infrastructural projects, the public should be able to ride out the tough times ahead. Wen Wei Po believes Hong Kong had shown through practice that it had found a way to sabotage speculators' ploy to profit by a simultaneous attack on the foreign exchange, stock, and futures markets. Freedom in the markets did not mean a total lack of constraint. Under specific circumstances, governments must intervene to stop a few people rigging markets. International speculators had now turned their attention to European and American stock markets. Sooner or later, other countries would review speculative exploitation of financial derivatives to wreak havoc in the markets. Hong Kong might have provided a valuable lesson for others as the world's financial markets marched towards integration, said the paper. Ta Kung Pao said international speculator George Soros had exposed the ugly side of his face by admitting he had sold Hong Kong shares short and bet on big falls in the Hang Seng Index. Had the Government not intervened, speculators might have succeeded in pushing the index down to 5,000 points. The Government should be commended for undermining their plan, maintaining order in the markets and protecting Hong Kong people's assets. Most newspapers also urged a review of the eligibility criteria for the first-time home-buyer loan scheme. Ming Pao said an upper ceiling should be set on the price of flats bought under the scheme, following a public outcry against an applicant using his loan to buy a Mid-Levels flat worth more than $7 million. The Hong Kong Economic Journal believes it was right for the Government to scrap the sandwich class housing scheme following falls in property values. However, eligibility criteria of this scheme and the first-time home-buyer scheme were similar. Either the loan scheme should also be scrapped or its criteria should be tightened to benefit only low-income families.