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Saturday, 25 October, 1997, 14:46 GMT 15:46 UK
Review of the week: Turmoil for the markets
Martin Webber of our Business staff looked back at the week's financial stories in World Business Review on the BBC World Service:

The typhoon of financial turmoil that's been circling around south-east Asia over recent months finally arrived in Hong Kong last week. The storm built up day by day until Thursday when the market took its heaviest drenching. The main Hang Seng Index slumped ten per cent - the sharpest one-day slide for eight years. Paul Shulte, who's head of regional strategy at the bankers ING Barings in Hong Kong, explained how the collapse of confidence throughout the region had hit the former British colony.

"Hong Kong's retail shops are empty. Its cafes, aircraft are empty. And the financial services in Hong Kong have taken a very severe hit, given the drop-off in volume and investment banking activity."

The panic in the Hong Kong markets has a familiar ring about it. In recent months, speculators in the big American banks and hedge funds have targeted the South-east Asian policy of setting a fixed exchange rate between their local currency and the United States dollar.

In Thailand, Malaysia, Indonesia and the Phillipines, the tactics have been the same. The speculators make a bet that the local stock market will fall - what they call "selling a market short". The same speculators then pile in to sell the local currency. That forces the authorities into pushing up local interest rates to defend the currency, which in turn hits profits of local companies and so the local stock market slides. The speculators' initial bet on falling share prices pays handsomely. The losers tend to be those small time investors who bought into the markets at their peak, lured by the region's long term potential. But the damage goes well beyond stock market losers, there's a huge economic cost as well, as Paul Shulte of ING Barings explains.

"The economic costs of all this are: massive foreign exchange losses - between 35 and 45 billion dollars for the corporate sector of Asia. The other cost is going to be a dramatic slowdown in economic activity, increased expenses for companies going forward who have to hedge their foreign currency debt - and I guess, to sum it up, the end of the free lunch that Asia has had with fixed or pegged exchange rates for a decade."

The moral justification for the speculators' actions is that Asia's currency pegs to the dollar aren't economically sensible any more. The traders are doing the region a favour in the long term by giving them a more competitive exchange rate. Indeed, amid little fanfare, the Zurich based electrical engineering group, ABB, said last week it would accelerate its local expansion in Asia. At the same time, it would cut 10,000 jobs in uncompetitive operations in western Europe and the United States.

But the question is: does what goes for Thailand, Malaysia, the Philippines and Indonesia also go for Hong Kong. Despite the avalanche of selling by the hedge funds, it seems the clever whizkids might this time have got it wrong.

Hong Kong is different. Not only does it lack the underlying economic problems endemic elsewhere in the region, Hong Kong's fixed currency peg is of a different nature. Thailand had to give up its fight with the markets when too many people wanted to hand in their Thai Baht, and Thailand's US dollar reserves were exhaused. But in Hong Kong, a so-called "currency board" system is in place whereby nearly all local currency is backed up by US dollars. Hong Kong dollars can therefore in theory be cashed in until there are none left in circulation to sell. So the economist Jake Van der Kemp of the brokers Hoare Govett in Hong Kong is still confident that Hong Kong's currency peg will hold fast.

"I think we are now in a crisis. This has been building up for some time, through August already, as the currencies elsewhere started to crack. We are now at the point of crisis on this one. When it's proven that it can stand the biggest attack that's been mounted against it in its history and still come clear through the other side, we will have a firmer peg than we've ever had before, the interest rates will go down and the market will rally."

However, even if the Hong Kong authorities are able to maintain the peg, the fact remains that Hong Kong's industries have been hit by the devaluations elsewhere in the region. To people in South East Asia who are being paid in devalued local currencies, prices in Hong Kong now look very expensive.

Some Hong Kong industrialists are hinting that they feel a fall in the Hong Kong dollar may now be desirable to maintain competitiveness.

But Howard Gorges of the South China Brokerage Company says the competitiveness argument for devaluation doesn't wash.

"Almost all of Hong Kong's exporting - and it's very substantial - is done from China, where the cost base and still competitive with anywhere in the region. And so the fact that our hotel rooms may cost more and other things may be more expensive in Hong Kong is not that important, because we're developing strongly as a financial centre, and also as the main conduit for China to raise money to restructure their state enterprises through the Stock Exchange here. I think Hong Kong is going to suffer from this relative over-valuation, but I don't think it's the be-all end-all."

Justifying that optimism, the Hong Kong market rallied on Friday. Still, share prices have fallen by a third since their peak in August, and Howard Gorges admits the speculators may well return.

"The speculators - usually, one gathers, American houses have a way of trying to find some weakness in the system - usually by selling Hong Kong dollars forward and trying to push the inter-bank rates up. This is the sort of game that's been going on, unfortunately. And I daresay that there'll be further attempts at this sort of activity. But the government's very strong action in the last couple of days has, I think, seen off a speculative attack and also demonstrated to the world at large that we ARE going to stick with our peg."

With the global pollution summit coming up at Kyoto in Japan in December, President Clinton last week spelt out what he wanted the United States to do to cut its nasty emissions.

"The United States proposes at Kyoto that we commit to the binding and realistic target of returning to emissions of 1990 levels - between 2008 and 2012."

Which sounds and was meant to sound impressive. But the United States is the world's richest nation and the world's biggest pollutor. For environmentalists, the President was not going nearly far enough. Here's Dan Becker at the environmentalist Sierra Club.

"He's fighting a five-alarm blaze with a fire hose. To confront global warming, what we really need to do is require that the automobile and oil industry take real steps to reduce pollution - starting now. But this plan only puts Exon and General Motors on an auto system, to cut global warming pollution. And that won't protect our kids. The biggest single step we can take in the US to curb global warming is to cut the auto emissions by making our cars go further on a gallon of gas."

There was a very different reaction from the Global Climate Coalition - a business grouping of major American energy users . The coalition's Gale McDonald told us that the President's plans were unaceptable because they were too ambitious.

"It pulls us into the whole world of legally binding targets. And inevitably it means higher taxes and rationing of energy. The cost of doing business will go up substantially. And it won't affect the environment, because all these developing countries, with their growing economies, will pass us. The UK and the US people can sit in the dark. Emissions will still continue to rise, unless the developing world is involved."

If you think you've seen it all already, prepare for a shock. Not even the moon is safe from the reach of the world's advertisers. One enterprising London advertiser last week, floated the idea of projecting an advertising logo on to the moon's surface, visible from the earth. Malcolm Green says he's already interested several clients in his scheme to send up a series of satellites and mirrors made of silver foil up into space.

"We've approached people like Nike. McDonald's, Disney - people who have symbols or logos or something which kind of sums up what they're all about. In other words, if you see the Nike tick, that says everything about the philosophy or the attitude of Nike - the "just do it" kind of attitude. And that, coupled with the fact that they would have just done it - in terms of the moon - is an ad, in a sense. So those are the people we're approaching. Of course, everybody says: "Well, hang on a sec: this is impossible, isn't it?" But even the homework that we've done so far shows that it's actually very, very possible."

Experts say it could cost several billion dollars to put a big enough mirror into space....which may be out of reach of the budget of even the biggest multi-nationals at the moment. But for how long?

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