30 AUGUST 2013
Dr Chan Yan Chong’s Column
By Dr Chan Yan Chong
Southeast Asian markets took a dive that reminded investors of the 1997 Asian financial crisis, while Hong Kong also plunged 1,000 points in merely three trading days. Although the Straits Times Index (STI) fell 100 points, it was nothing compared to the magnitude of the Hang Seng Index’s (HSI) fall. When Hong Kong staged a strong rebound, the rebound in the STI was much smaller.
The HSI fell from 21 August to 23 August but rebounded sharply on the third day, mirroring the fine performance of the Shanghai Composite Index (SSE). The HSI had once again tracked back the performance of the Chinese bourses but nobody knows what will happen next.
It has been 16 long years since the Asian financial crisis struck and younger investors do not have the full knowledge of what had happened back then. I feel that it is good to do a recap of the events that led to the crisis so that we can learn from past lessons.
The HSI and the STI hit new highs in 1997 and so did property prices. The people in Hong Kong were happily embracing the return of Hong Kong back to China on 1 July but disaster struck the following day in Thailand. The Thai government announced the break of the Thai baht-US dollar peg and the Thai baht plunged drastically within a day. The domino effect soon hit many countries in Asia, including Singapore, where currencies plunged not by 10 percent or 20 percent but by as much as 50 percent to 80 percent! All of a sudden, inflation shot up when prices surged and chaos took place.
Within the same year, the governments in Thailand, South Korea, Philippines and Indonesia were replaced with new regimes, with Indonesia facing the worst political crisis when Suharto was toppled after 30 years at helm. The currency speculators tasted blood and were hungry for more, choosing Hong Kong as their next market but little did they know that Hong Kong had reserves that were much more than its Asian counterparts. On the face of it, the speculators seemed to be trying to break the Hong Kong dollar-US dollar peg, but they were more interested in short selling Hong Kong stocks hence the HSI plunged with no reprieve until August 1998 when the Hong Kong government intervened by buying up the component stocks. This move stopped the index futures from falling and beat off the speculators.
Early September 1998, Malaysia announced measures that killed off the speculators by imposing capital measures that restricted the trading of the ringgit which effectively ended all speculative activities in Malaysian stocks. The measures also froze trading of CLOB shares in Singapore while assets of the speculators were “trapped” in Malaysia.
In Russia, the government unilaterally announced that all government debt in the hands of the speculators were worth nothing, resulting in the collapse of US hedge fund Long-Term Capital Management. Federal Reserve (Fed) chairman Alan Greenspan had no choice but to put out a rescue package that spelt the beginning of the end of the Asian financial crisis.
Global markets fell rather meaningfully in June after the Fed announced its exit strategy in late May. The markets then rebounded in July but started falling again in August with the currencies and stock markets of emerging markets the most badly hit. The falling trend did not take place overnight but has been happening since May, and the situation got worse by the day. Incidentally, the US and Singapore markets fell to the June lows and that was a worrying sign.
The yields on the US ten-year treasury rose from a low of 1.7 percent in May to as high as 2.9 percent – a hefty 70 percent increase, which reflects fear of the end of stimulus measures. It is a certainty that the Fed will pull away the safety net after keeping it there for so many years but nobody knows when and by how much.
According to the minutes of the previous Fed meeting, most members of the committee are comfortable with Bernanke’s plans to withdraw the stimulus measures but there has been no consensus as yet. Some believe that September will be a good time while others think that October is also possible. It is a shoo-in that Bernanke will start the ball rolling for the beginning of the end of stimulus as he was the person who started it.
Fed officials have already started preparing investors for the inevitable, which is why stock markets are falling and money is leaving the emerging markets. Now that the bad news have been priced in, markets may even rebound once Bernanke makes his first move. It is unlikely that the speculators will want to take more risk in the event that there is no announcement of a tapering in September hence it is unlikely that bond yields will rise much further and stock markets falling much deeper.
Two years ago, there were many salesmen selling funds of emerging markets and that attracted plenty of investors. Once the speculators have pushed up the prices of stocks in these countries, they will sell, short sell and then force the prices down. This is the modus operandi of international speculators.
If we were to analyse the situation of the various Asian countries, we can spot some similarities between now and then. Back then, the US economy was in a recovery stage and the greenback strengthened not unlike now. Back in 1997, however, several Asian currencies were pegged to the US dollar and had to break the peg when the economies went downhill hence inviting with open arms speculators like George Soros.
Today, however, only the Hong Kong dollar is pegged to the US dollar while the rest of the currencies are traded freely. Although Asian economies have weakened lately, their currencies have already reflected their fair values in the free market hence there is no danger of attacks from speculators. In 1997, stocks were at historical highs but stocks these days are languishing at levels neither too high nor too low so speculators are unable to see much downside from current levels. How low can the HSI go from here? From 22,000 to 19,000? Buy if that happens.
At this point in time, there is no chance of the speculators wreaking havoc in China because the financial market in China is regulated. The China A shares are so cheap that it is almost impossible to short sell them for profit. So why did the rupiah and the Indonesian stock market plunge after media reports on 20 August? Blame it on the speculators controlling the western media.
When stock markets plunge, analysts will be quick to sound the crisis alarm while the media and the rating agencies, all under the influence of the speculators, will be quick to jump onto the bandwagon. By doing so, they not only make a profit and can hit the economies of countries that will pose a threat to US hegemony. If the US do not maintain the pole position in the world, who is going to help roll the US$15 trillion debt that the US owe to the world?
Publish date: 30/08/13