Hong Kong's monetary authorities threw a press conference last Thursday to announce it had recovered more than the HK$118 billion spent on the 1998 market intervention - and of course it is still sitting on a mound of stocks. Yes, it is proud and cocky and has many reasons to be so. It is sitting on profits and no one has dared come after the Hong Kong dollar peg since - even recently, amid regional currency turmoil, the devaluation of Turkey's fixed currency and calls for the abandonment of the Argentina peg. These days, however, with life on Hong Kong's markets one long yawn, investment banks paring jobs and brokers nervous of the next chop, who wouldn't welcome speculators back? At least it is business. At the time of the intervention, in the third quarter of 1998, the Government implemented a set of measures to strengthen the currency board system and to make it harder to short-sell Hong Kong stocks and futures. Praise can be heaped on the adjustments to the bank-funding window which provides a liquidity cushion in times of capital flight, that can prevent interbank lending rates from spiking. Because the peg is not under attack, local banks can keep pace with the down-cycle in United States' interest rates. That adds up to a smaller mortgage burden for those thinking of buying, and more spending money for those already buying homes. One group which probably will not be lured too easily into the property market works for stockbrokers. And that is what wrong with this picture. The stock market is dead. Until the last two trading days of last week, turnover hadn't cracked the HK$10 billion level since mid-March. The daily average so far this year is HK$8.81 billion, just more than half the HK$17.37 billion a day in the period last year. One would presume short-selling should rise in such bearish times, but it has averaged just HK$300 million a day so far, no higher than average levels seen since late 1998 and much quieter than before the anti-speculative measures. Futures trade is up, thanks largely to the growing presence of retail investors, but the market is a shadow of what it was pre-intervention. Yes, turnover around the globe has fallen off but you don't have to buy stocks. Investors can also short stocks, for instance, which would add a little life in this dead market. They can short the lead index in the futures market. Maybe the Hong Kong Monetary Authority did too good a job. 'They threw the baby out with the bath water,' said Henry Lee, whose boutique hedge fund Hendale Investment packed up and left Hong Kong (though Hendale remains a private investor). Besides the memory of Government intervention and the bend over backwards compliance of supposedly independent regulatory groups, such as the stock and futures exchanges (since merged), there are a few cumbersome rules ready for retirement. Investors can only short a stock on the uptick (after an upward move); the two-day settlement enforcement on shorts can be stressful for overseas investors; disclosure is a must for investors with futures orders of more than 10,000 contracts. Let people short in a down market - it makes it easy to trade the index futures and other derivatives, to arbitrage, to hedge, to speculate. Give overseas investors space to settle and stop trying to embarrass big clients. And stop bragging. Soon, Morgan Stanley Capital International (MSCI) will announce its criteria for calculating the free float in Asia as part of a global revision of its indices to account for whether or not shares are freely available for trade. If MSCI decides to exclude the HK$110 billion of shares the Government still holds in Hong Kong stocks from their 'free float' - on the reasonable basis that they do not trade freely - then Hong Kong's weighting in the index series shrinks that extra notch. Jake van der Kamp is on holiday. Email: cathyholcome@scmp.com
