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Stock Prices Plunge 10 Percent in Hong Kong on Economic Worries; Prices in Europe Fall 3 to 4

October 23, 1997

Stock Prices Plunge 10 Percent in Hong Kong on Economic Worries; Prices in Europe Fall 3 to 4 PercentBy MARCUS ELIASON

HONG KONG (AP) _ Hong Kong stocks suffered their worst fall in a decade today in a burst of panic selling triggered by rocketing interest rates and fears that the vibrant Hong Kong economy may be infected by turmoil elsewhere in Asia.

The plunge by Hong Kong shares sent shudders through European stock markets, where losses were heavy by mid-afternoon. Prices of U.S. Treasury bonds soared, propelled by investors seeking a safe haven for their cash. The U.S. dollar also gained because investors bought dollars to purchase bonds.

Financial Secretary Donald Tsang disclosed that monetary authorities were forced to dip into Hong Kong’s bulging foreign exchange coffers to sell U.S. dollars overnight and support the currency.

This triggered the interest rate hikes that pounded the stock market the next morning, he said, but added that it was the price of defending the currency’s peg to the U.S. dollar, ``our top priority.″

The key blue chip index, the Hang Seng, shed 14 percent in morning trading before recovering slightly. The losses hammered down Tokyo’s Nikkei Stock Average by 3.03 percent, and shares also took a further battering in Malaysia, Singapore, Indonesia and the Philippines _ as well as in Europe.

At the London Stock Exchange, the blue-chip Financial Times-Stock Exchange 100-share index was down 188.6 points, or 3.7 percent, at 4,960.2 by mid-afternoon.

During the first 16 minutes, however, the 100-share index dropped 199.8 points, or 3.9 percent, as it tumbled to an early low of 4,949.0.

Prices were getting hammered elsewhere as well, with Germany’s DAX index off by 4.7 percent. In Paris, the CAC 40 index had fallen 3.3 percent.

In New York, prices of 30-year Treasury bonds surged this morning, sending yields _ which move in the opposite direction _ tumbling to 6.32 percent from 6.42 percent late Wednesday.

U.S. Treasury securities are deemed among the safest investments worldwide and typically are a resting place for money in times of panic.

Analysts said the Hang Seng’s plunge raised the question of whether Hong Kong can continue to insulate itself from the rest of Asia, despite fundamental economic distinctions.

Where other Asian economies suffer from perceptions that they suffer serious institutional flaws, Hong Kong’s system is the International Monetary Fund’s model of rectitude. Its problems stem mostly from having the only Asian currency still pegged to the U.S. dollar.

That makes it the only currency that could still tempt concerted speculative attack. Hong Kong authorities say they will fight back at all costs because they view a stable, dollar-pegged currency as vital to maintaining international confidence in Hong Kong now that China has taken over from Britain.

``The fear is that this is going to affect world markets,″ said Glen Poulter, a stock dealer at Schroders in London. ``I spoke to traders yesterday and none of them were talking about Hong Kong. Today, that’s all they’re talking about.″

As often happens, nervous European traders were waiting for direction from the opening on Wall Street.

But the big action occurred overnight when interbank rates that determine the short-time price of borrowing for such an attack shot up to 150 percent, and three major banks hiked their prime rates by 0.75 percent to 9.5 percent today.

The result was a sharp strengthening of the dollar to 7.69 from 7.74, but the high interest rates could rock Hong Kong’s high-flying property market and raise question marks about the price of doing business here.

Steven Xu, an economist at Standard Chartered Bank, said he was confident the peg would stay, but ``if every country in Asia starting with Japan has to go through a deflationary process, it seems Hong Kong cannot be spared.″

Today’s plunge followed three days of falls that had already shaved 14 percent from the market’s value since Friday. The market has lost 37 percent of its value since hitting a high of 16,673.27 on Aug. 7.

The Hang Seng, which closed at 11,637.77 Wednesday, dipped below the 10,000 level today. It closed at 10,426.3, down 10 percent for the day and 23 percent for the week.

Anson Chan, Hong Kong’s top civil servant, urged calm.

``Hong Kong cannot escape being affected in the short term by what’s happening in the region,″ she told reporters.

``But the important thing is that our economic fundamentals remain very strong and we have absolute determination to defend the Hong Kong dollar.″

Elsewhere, the main Philippine index plunged to a four-year low, with traders citing U.S. investment bank Morgan Stanley’s recommendation to reduce portfolio weightings for developed Asian markets to zero from 2 percent.

In Malaysia, one of the countries worst hit in the turmoil that began in July, the main index shed 4.7 percent while the ringgit hit its lowest level against the U.S. dollar since the Malaysian currency was floated 24 years ago.

Singapore’s index was down 5.4 percent, Indonesia’s 2.4 percent, while Taiwan finished 1.7 percent higher, South Korea was up 2.74 percent and Thailand markets, whose woes triggered the regional crisis, were closed for a public holiday.

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