Money crisis sweeps Asia Hong Kong is latest victim

U.S. companies rethink their plans

October 24, 1997|By Jay Hancock | Jay Hancock,SUN STAFF

Hong Kong's currency crisis is either the final tranquilizer dart in the hide of the Asian "tigers" or the best opportunity to make big money in small-nation bond markets since 1995.

Either way, U.S. investors are paying close attention.

After shrugging off the Pacific Basin's cascading economic symptoms for more than three months, U.S. stock markets resounded in sympathy yesterday. The Dow Jones industrial average fell by 186.88 to 7,847.77 after reports that Hong Kong stocks had plunged 10 percent, extending the Asian financial center's losses past 37 percent since August.

It was another demonstration of the hair-trigger links among modern financial markets.

The direct cause of Wall Street's swoon, analysts said, was worry about the profits of U.S. companies that do business in the Far East. A resurgent U.S. economy, growing export expertise and a cheap dollar have allowed American companies of all stripes to boost sales to the region.

Growing economic chaos in the Pacific Basin puts those sales at risk.

"A situation like this reminds everyone very much of what happened in Mexico" when that country's economic crisis in 1994 hurt U.S. exports, said Penelope Menzies, executive director of the Maryland World Trade Center Institute.

Now that the malady has touched Hong Kong -- until this week regarded as the region's economic stalwart -- investors worry that the damage may spread farther and deeper.

"Many people are saying the Asian financial flu has now caught Hong Kong," said Harold Adams, chairman of RTKL Associates, a Baltimore architectural firm with numerous projects in the Far East.

RTKL is a good example of how U.S. prosperity can be threatened by Asian economic problems. Since mid-summer, the firm's train terminal project in Thailand has been put on hold; it is having bill-collection problems in Malaysia and "a similar situation in Indonesia," Adams said.

Last year RTKL booked about 5 percent of its sales in Malaysia, Thailand, Indonesia and the Philippines. It also has many projects in and through Hong Kong.

Adams remained optimistic yesterday about Hong Kong and a few other "tigers," as emerging Asian economies are known. But not everybody shared his view.

"It's a tough call," said Paul Boltz, chief economist for T. Rowe Price Associates, the Baltimore-based mutual fund company. "There is considerable doubt in the foreign exchange markets about whether the Hong Kong dollar can maintain its lock with the U.S. dollar."

The Hong Kong dollar remained at ground zero yesterday in a region-wide currency bombardment that started last spring.

The trouble began in May, when Thailand's economy began to slow, its political situation wobbled and speculators decided it was time to sell the baht, Thailand's currency.

Baht dumping caused Thai interest rates to rise. The government faced a dilemma familiar to many currency defenders in recent years, including those in Hong Kong now: Should it tolerate high interest rates that would cripple stock markets and hobble the economy? Or should it let the air out of rates by devaluing the currency and generating huge profits for the speculators?

Thai monetary authorities chose the second option, and the move emboldened currency pros to attack other Asian money. Since Thailand decided to float the baht in early July, currencies in Malaysia, the Philippines, Singapore, Taiwan and Korea have plunged against the dollar.

That put pressure on Hong Kong. With every currency devaluation in its neighbor countries, Hong Kong's dollars and products became relatively more expensive in world markets.

"Hong Kong competes with those countries in the export markets to Japan, Europe and the United States," said Brian McCarthy, a currency analyst with Ruesch International in Washington, and its products are now far less competitive.

Some other country might have thrown in the towel last summer and devalued along with the rest of the region. But Hong Kong, which became part of China last summer, has thrived as one of the world's top financial centers largely because of its granite-like currency, tightly wired to the U.S. dollar since 1983.

Unlike most countries, Hong Kong operates on a "currency board" system, in which all Hong Kong dollars in circulation are backed by U.S. dollars in reserve vaults. The rate is 7.75 Hong Kong dollars for each U.S. dollar.

Theoretically, this should render the Hong Kong currency bulletproof to speculative selling, or as bulletproof as the U.S. dollar itself. A steel-clad guarantee to exchange Hong Kong dollars for U.S. greenbacks -- and the reserves to back it up -- ought to quell all fears of devaluation.

But speculators are starting to bet that Hong Kong's new masters, who replaced British colonial rule in July, will find it politically useful to devalue anyway. Investors have been selling Hong Kong dollars in buckets this week, pushing short-term interest rates to annualized levels of more than 100 percent and sparking a Hong Kong stock market plunge.

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