FOR France to stay in the ERM after the Bundesbank action would be like for a battered wife to go back from the hospital to her husband. So said financier George Soros yesterday. With that Mr Soros, the scourge of the central bankers and the man accredited with knocking sterling out of the European exchange grid last year, threw his not inconsiderable financial clout into the attack on the French franc. As this column goes to bed it's possible the Exchange Rate Mechanism might not survive until breakfast-time, at least not in its present-form. The European Community's monetary committee was meeting in emergency session in Brussels late last night (Hong Kong time) to discuss the crisis. Despite massive support from central banks five of the ERM currencies - the French and Belgian francs, the Danish krone, the Spanish peseta and the Portuguese escudo - took a battering as panic hit currency markets. It was a black day also for Hong Kong investors in European currencies. The signs that the French franc and the ERM were in trouble have been clear for the past three weeks yet investors could be forgiven for thinking that the Bundesbank would not abandon its European neighbours for a second time. Yet due to its own domestic concerns, a widely expected cut in German discount rates didn't materialise last week which precipitated the crisis. A widening of the exchange rate bands is the most probable outcome of the weekend talks in Brussels. It will be like sticking a band aid over a shark bite. The Economist magazine suggests increasing the band widths within which currencies can fluctuate to as much as 10 per cent from the present 21/4 per cent. But with such wide bands is there really a system in place at all? It was one thing for sterling and the lira to fly out of the system, as they did last year, but for the strong franc - at the core of the ERM - to face the guillotine is another matter. What it shows is that the ERM does not work. There are many complicated reasons for that. There are also simple ones. Exchange rates are functions of economies, not the other way round, and it is necessary for economies to be more in line before exchange rates match. To try and force the issue with a political artifice is a nonsense and market forces don't stand for that. THE stock exchange and Securities and Futures Commission plugged a major loophole in investor protection with rules brought in last week to stop mainland assets being injected wily-nily into Hong Kong-listed companies. The aim of the rules is to stop a suspected practice where controlling shareholders buy up mainland assets, have them revalued at a higher price and then sell them on to their listed companies. Already there are complaints that it will prevent purchases made for legitimate reasons. The authorities have said such instances will be considered on their merits. However, a compelling case would have to be made. If a controlling shareholder finds an undervalued asset it is his shareholders, not himself who should profit.
