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Market now hit by politics

FINALLY, Hong Kong investors have rediscovered domestic politics.

The passage of the first part of Governor Chris Patten's political reform bill in Legco on Wednesday was another puncture in the liquidity balloon that pushed stocks up last year.

This puncture was just one more to add to those by US Federal Reserve chairman Alan Greenspan in his inflation fear reports to Congress during January.

He capped by increasing interest rates by 0.25 per cent, the first rise after years of declines. Although small, the latest puncture deflated market sentiment in New York and London.

Mr Patten's reforming zeal has added more holes to the canvass, with the release of the goings-on in the Sino-British talks and the tabling of the second part of his political reform bill.

These holes have deflated the Hang Seng Index by 17 per cent in three weeks.

Some people remain steadfastly confident, but will a turn around come soon enough to allow local investors, who have borrowed ahead of the expected Chinese New Year rally, to keep their shirts? Probably not.

The interesting feature about trading over the last two weeks is that volume has been low.

The market has been steadily dropping, but, given the absence of big deals, one might have assumed cash-rich investors were awaiting the moment to strike.

Yesterday's trading was the first time volume has gone over $7 billion in two weeks, and most of the money was leaving the market.

There is also a feeling that the great rush of overseas funds into the Hong Kong market is over.

There is a danger that a number of very large institutions will conclude that the dead hand of political tension and verbal warfare in Sino-British relations is going to keep the Hang Seng Index firmly anchored below its last record of 12,201 on January 4 for quite some time.

Although fundamentally Hong Kong still looks good they might decide to cut their losses and run for some other burgeoning market, either in Asia or elsewhere.