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SCMP Reporter

SO, things are better again: Financial Secretary Donald Tsang Yam-kuen and Hong Kong Monetary Authority chief executive Joseph Yam Chi-kwong have beaten back the speculators.

 The rule-tightening measures that are aimed at strengthening the linked exchange-rate system and reducing interest rate volatility seem to have worked.

 If the Hang Seng Index fell sharply at all this week, it was because of extraneous issues such as United States President Bill Clinton's sexual misdemeanours and worries about monetary policy, rather than any speculative activity.

 Yet, the truth seems to be that rather than scare away the speculators, Mr Tsang and Co have only put their activities on hold.

 The new rules introduced last week are complex, and the hedge funds are keen to work them out and see exactly what they mean before they act.

 A straw poll of brokers who deal on behalf of hedge funds shows the funds are still present - but just not active.

 The shorts are being rolled over as they become due and, as a consequence, stock lending in Hong Kong equities has reportedly eased off.

 There is still some confusion among some hedge funds that they may not be able to go short again under the new rules, so some are reluctant to unwind their positions.

 But many brokers say there is increasing evidence hedge funds have become more convinced than ever that the days of the peg are numbered.

 Several say the Government may prove to be a victim of its own counter-speculative activities and, in the end, find that its measures counter-productive.

 Before the huge weight of speculative activity was unleashed against the Hong Kong dollar and the Hang Seng Index, few players believed the peg would break. Instead, many were just interested in taking the easy profits that could be generated from the mainland's warnings that it might devalue the yuan.

 It was regarded as a cinch to make money by selling forward Hong Kong dollar six-month contracts. Fat profits could be earned every time the spread widened on yuan devaluation fears.

 Hong Kong's aggressive reaction - which effectively amounts to a tweaking of the rules - may now make it more difficult for speculators to make short-term, heavily-leveraged attacks on the currency, but that is all.

 The monthly Merrill Lynch-Gallop survey, released last week, shows that fund managers have become increasingly convinced the peg will break soon.

 Admittedly, the survey was conducted before the Government toughened its rules on currency trading, but analysts do not expect any dramatic change in the view held by at least half of the Asian fund managers who believe the peg will break by next year.

 Indeed, they argue that the determination with which the Government moved to defend the peg highlights how little it appears to be doing to improve Hong Kong's fundamental economic performance.

 Property prices, despite their steep fall, are still regarded as far too high, and the cost of goods and services in the SAR is seen as out of kilter with the rest of the region.

 Instead of stepping away from the market and allowing it to adjust naturally, or taking measures to ensure local prices reflect the economic reality, the Government has shown itself as unable or unwilling to accept the deficiencies that plague the economy.

 Now, Hong Kong's position is worse than could have been imagined. At the same time as the Government has tried to fend off speculators, the rest of the world has begun to enter a downward trend.

  The turmoil will continue to damage any chances of a recovery in Asia and, therefore, maintain pressure on the mainland to devalue the yuan.

 The message for Hong Kong is that, far from enabling the dollar to live to fight another day, the Government's measures may have knocked a few more nails in its coffin.

Close: 5118.60 Down: 48.40 points 



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