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A purely analytical perception...


Hong Kong
ET TU HONG KONG?

 

Why do some countries have concern where their currency trades relative to others? Why do they usually want their currency higher rather than lower? The most apparent reasons are a) national prestige b) to be able to purchase other countries goods at attractive prices c) debt repayment increases as the indigenous currency drops in relationship to others d) currency rises and exports are no long competitive.

 

These reasons are pretty obvious, but there are others that are harder to fathom. Hong Kong established their “peg” in 1983 at a rate that has held all these years, 7.8 to the U. S. dollar. Why do they continue to maintain the "peg" when their stock market is already down substantially, interest rates climbing skyward and the value of real estate in the former colony dropping like a lead weight. Although currency values are more perception than reality, it is obvious that the value of a currency is a function of the future economic viability of an economy. With other currencies in the region imploded, it is obvious that Hong Kong will suffer a substantial competitive disadvantage for a period of time as their neighbors seek to export their way out of a financial morass.

 

THE HORNS OF A DILEMA

 

Knowing that it will cause them substantial pain, why then do they insist on holding the peg.  Part of Hong Kong's strategy is holding the currency within its current trading band is an automatic system, which raises interest rates as long as the currency is being attacked. This practice in theory is rather interesting, the higher the interest rate an investor can get in Hong Kong, the more likely it is that he will invest there. This brings a flow of hard currency into the system simultaneously with it being attacked. This seems to be the ultimate game of chicken with the stacks being automatically raised and lowered as the game progresses.  It would appear that the Hong Kong Government is the "House" in one of the biggest crap games in global economic history.

 

This of course makes it more expensive to pay off loans within the Colony. The alternative though is the additional problem that Hong Kong developers owe significant  amounts of money to offshore lenders that will be more expensive to repay if they Hong Kong Dollars was allowed to float. The Wall Street Journal on January 27, 1998 simplified the answer, “a) a credible monetary policy, b) low inflation c) predictable exchange rate d) enhancement of trade because of the predictable exchange rate e) low interest rates.” These are the elements that Hong Kong believed would aid them in building an empire. Government officials wanted to do it from a credible position and although currencies in the region fluctuated throughout the pegged years, there was never such an abrupt and catastrophic experience as we have seen of late with panic and collapse taking place..   

 

“Independent Strategy a London financial consulting firm, predicts China will devalue the yuan by 30% to 40% within 18 months. When it does, the Hong Kong dollar-U.S. dollar peg is doomed and serious damage will have occurred to one of the pillars of the global financial system.” ([1]) While I agree totally with the statement, I wonder why they think it is going to take that long. So, currency speculators, after cleaning up in the rest of the region have turned their eyes toward Hong Kong, which had stood tall while all else around them had collapsed. Stock markets elsewhere had lost everything that they had gained in the last decade and every currency in the region including Singapore's was feeling large doses of pain. As the stock market bears and the currency vultures turned their attention to Hong Kong, even Taiwan succumbed, with their enormous foreign currency reserves; now the pack-descended en mass determining to bring Hong Kong to its knees as well.

 

The logic was inescapable, hadn't Taiwan given in when they still held all of the financial cards? Obviously, the considerations were market oriented. If all of their neighbors had devalued, Taiwan's products would have been at an enormous competitive disadvantage. Competition had reached a stage why many of the nations could produce products of equivalent quality in mass production. When it came time to give quotes to buyers, variations were registered in fractions of a cent. Currency levels had become critical and Taiwan's was now hopelessly out of sync. Logic dictated a change of venue and change they did.

 

 

THE SHARKS SAW SOMETHING IN THE WATER THAT LOOKED GOOD TO EAT, THEY WENT AFTER IT, BUT IN THIS DOG EAT DOG WORLD, YOU CAN NEVER BE SURE OF WHOSE GOING TO BE THE MEAL

 

The horde when they descended on Hong Kong smelled blood, but they did not stop to analyze the differences between the two regions. Hong Kong had become a service-oriented economy and was farming out production elsewhere. They were the users not the manufacturers and as such, the higher their currency could be pegged against those of their suppliers, the greater the profit they could make. That argument although unassailable is mere child's play in comparison to the fact that Hong Kong's treasury is awash with foreign currency and they have made the pledge to hold one dollar of foreign currency reserves for  every dollar of their own currency that is outstanding.

 

Thus, an interesting conundrum has developed, attacking the Hong Kong dollar would only cause there to be a diminishing supply but would have no effect at all upon the peg. (On the other hand there is more here than meets the eye and we shall address it later). Moreover, have you heard about face. As we are well aware, face must be maintained in this region with near religious zeal. How do you think that China would feel, only a short time after subverting Hong Kong, the currency collapsed?  We believe that this would not be an acceptable occurrence and I trust this would make them evil spirited. Thus, it would seem that if push came to shove they would throw their immense reserves into the battle and create a currency buffer that would become virtually impenetrable to currency speculators.

 

They could defend the Hong Kong dollar and their own until the cows came home and not have to look back. Face is important, but is it everything. It is hard for Westerners to understand the Oriental mind and no amount of analysis is going to differentiate where sound economic practices begin and face ends. Moreover, power doesn't make right and showing machismo doesn't put money in your pocket. Moreover, while it now makes sense for the Hong Kong currency to be re-pegged at a lower rate, the ultimate devaluation will probably take place at a time that the inscrutable Chinese can look at the world and say, this was a decision that we made based on our own economic consideration, not upon what was happening in the rest of the region. 

 

SOMETIMES THERE IS MORE TO THE STORY THAN YOU CAN ON SEE ON THE SURFACE

 

Why does it occur that when speculators sell Hong Kong dollars they decrease the float? When a sale of currency is made it is the same thing a the brokers requirement to deliver stock on settlement day. If a speculator sell something he doesn’t own, delivery still must be made. If infinite Hong Kong Dollars were sold short, infinite deliveries of those dollars would have to be made to the purchasers. Infinite Hong Kong Dollars obviously do not exist and therefore, the float of dollars diminishes as short sales take place.

 

As the float contracts, lender's ability to make new loans or even maintain loans outstanding, contracts as well. Thus, if enough currency traders simultaneously attacked the Hong Kong dollar, theoretically, there would be no dollars left in circulation and all loans made by the banks in that currency would have to be called. There is no way that China or anyone else could save Hong Kong under that scenario, but the Government could change the rules midstream. Malaysia did just that by virtually changing their currency from freely trading to blocked. While this wouldn't be cricket, not that many people play cricket anymore.

 

The ex-colony is rife with rumor and the hoards descend upon whatever bank or retail business that is rumored to be in trouble redeeming their cash or buying their merchandise before the predicted demise occurs. In spite of the Hong Kong Dollar holding firm, the reality is, the economy has slowed, and there now is unemployment, something unheard of in the past.

 

China has been shoveling its issues onto the Hong Kong Stock Exchange, with "red chips" ([2]) or H-shares now achieving 10% of the markets weighting in the Hang Seng Index. Thus, Hong Kong Stock Exchange is beginning to resemble Shanghai more and more every day, while historic companies making up the index in August only traded  24% of their market cap against a more normal 60%.  Real Estate has fallen precipitously and the stock market is hovering only slightly above its lows for the last year.  Tourism is down substantially and everything is becoming a little frayed at the seams.

 

A FRAYING SYSTEM

 

With financial pressure on all sides, Hong Kong is not a universe unto itself, it may be better to turn and run and come back to fight again another day.  Eventually, either because they are forced to do it by additional attacks on their currency or they do it because the Hong Kong dollar has become substantially overvalued relative to neighboring currencies, Hong Kong will devalue. They are too smart not to and the alternatives are most unpleasant. This unavoidable devaluation will come in the very near future.  Most illustrative of this is the fact that  the largest investment bank in Hong Kong, Peregrine Investment Holdings shut its doors, signaling to the global community that the king was no longer wearing any clothes. 

 

This particularly came particularly as a blow to China because Peregrine was the principal underwriter for their issues listed on the Hong Kong Stock Exchange. Using extremely poor judgement, Peregrine made the boo boo of lending a substantial part of its capital to PT Steady Safe, an Indonesian taxi and bus company. The allure of having one of Suharto's daughters as a major stockholder was their undoing.  PT's collapse ended its dream of turning the small company into a major builder of toll roads and ferries. Peregrine and Steady Safe literally tanked simultaneously when the financial hole in the Hong Kong investment bank's balance sheet could no longer be closed. Peregrine was a Chinese window in Hong Kong and although repeated attempts were made to get the Bank of China  to bail them out, the efforts were of no avail. 

 

A young man by the name of John Lee was head of risk control at Peregrine. It would seem that having such a distinguished title he would have analyzed the risks of investing such a substantial portion of the firm’s capital into an Indonesian Taxi Company. Peregrine was different than other Hong Kong Investment Bankers, and it was due to that significant difference that Peregrine was able to capture such a high a percentage of the business written in the former colony. You see, when Peregrine bid on a transaction, they, opposed to their competitor’s commitments, agreed to take the whole deal (bought deals) whether or not they could place it.

 

THE CHICKENS COME HOME TO ROOST

 

This certainly was of great value for companies trying to raise money. They did not have to wait to see if the broker was successful to be certain of receiving the agreed upon payment. However, this was their Achilles Heel and the reason that Peregrine was left with a portfolio of $1.1 billion of mostly remnants of parts of deals they couldn’t get rid of when it collapsed. All investment bankers maintain a portfolio of their deals from time to time. What made Peregrine so different was that most other global banking firms, would get rid of the trash and keep the blue chips, Peregrine did exactly the opposite, it got rid of its quality merchandise and kept paper that was literally worthless. Thus, they were left with this worst of all economic scenarios. The deals that are unsaleable are obviously the ones that no one wants and usually with good reason. Thus the remaining portfolio has become all but worthless.

 

But back to John Lee, if he were indeed the head of credit risk management, was he asleep at the switch? “Not so”, he says, in answers to a series of questions raised by the Wall Street Journal, January 23, 1998, he stated, “I did not know about the Steady Safe deal and I did not approve it.” Well if John Lee didn’t do it, could it have been Andre Lee, a Korean American youngster that had taken over the bond department in 1994 and proceeded to rack up $38 billion in placements during his watch. According to John Lee, his namesake was able, by buying bits and pieces over time to build up large positions without alarming or even perhaps notifying other departments. Andre Lee has hired counsel who has indicated that he won’t be talking to anyone. We do not believe that this will remain the case. 

 

I KNOW YOU ARE NOT GOING TO BELIEVE THIS BUT I PUT ALL THE MONEY INTO THAT INDONESIAN COMPANY, STEADY SAFE

 

In spite of the fact that obviously someone internally dropped the credit ball, It would seem that the $300 million financial hole that Steady Safe created in Peregrine’s balance sheet would have been a small price to pay for China to keep their window open and avoid the closure of what was Hong Kong's most prestigious investment bank. Now China will be forced to pay a much more substantial price to keep both their country's currency and Hong Kong's from devaluation. These people are not mindless, they were committed to keeping the peg, and government officials were well aware of the price differential of holding the peg with Peregrine alive and the price they would have to pay with it dead. This is a simple mathematical formula, and obviously the powers that be in adding up the numbers found it far cheaper to let Peregrine die.

 

AREN'T THESE THE SAME PEOPLE THAT BOUGHT ALL OF THE UKRANIAN DEBT AS WELL?

 

It isn't only China and Hong Kong that are in big time trouble over the Peregrine failure. Probably the most successful business that the investment bank had going for it was the repackaging of Thai and Indonesian debt for resale to South Korean and Japanese Banks that were looking for high yields. Well, even if the companies are still in business you can bet you last farthing that they aren't going to be able to pay back that debt with the drop in their currencies.  As the Peregrine story unfolds we anxiously await the list of their customers of that debt so that we can predict where the next shoe will drop but in the meantime we can let you in on a not so secret, First Chicago NBD gave those folks a ton of money.

 

But it doesn't end there, Peregrine will go down as one of economic history's most startling events; the folks that run the company are former executives with Citibank  and they were underwriting counterparty risk. Effectively what this means is that when Peregrine sold Korean and Japanese customers baht and rupiah denominated debt, in order to clinch the deal, Peregrine assumed the foreign-exchange risk.

 

In reality, there could well exist hundreds of millions of dollars of losses within Peregrine due to the collapse of these currencies. Peregrine will not be able to make those losses good and therefore the entire weight of the transaction will fall upon the Japanese and Korean Bank Investors. Until the collapse of Peregrine, there would have been no need to write down the currency loss attached to the transaction because that was not the investor banks problem and it undoubtedly carried off balance sheet as a form of derivative. With the demise of the insurer, the loss now comes home to roast. However, you can bet you last farthing that these losses are covered up, that is until the results of the investigation in Peregrines demise is concluded, and that may well be sometime in the 21st century. However, the losses are real and act as just another time bomb, ticking merrily away and ready to explode at the most in appropriate time for the highly exposed Japanese Banking System. 

 

WHEN IT RAINS IT POURS

 

But even that isn't the end of the story, more often than not Peregrine would get a major bank to front its currency guarantees for a fee. What this amount will be and who are the unlucky banks that are going to get stuck, we will soon hear about as the game of musical chair sorts out the losers for all to see...  Furthermore, Peregrine gave all of its fortunate patrons the opportunity to purchase millions of dollars worth of its floating-rate notes and commercial paper so that Peregrine could add to its huge portfolio of Asian Junk bonds. Now friends, these bonds were called junk bonds before the country's economies collapsed, we are no longer sure of what category that you would place junk debt that was now bankrupt. I guess you would call it a write-off.

 

This story is going to play out like a grade "B" movie and we believe that it will be one of the great economic calamities of all time.   We already are aware that Kongbang Peregrine Securities Co., the 44% owned Korean affiliate of Peregrine Investments Holding Ltd. was purchasing debt securities of the parent as fast they could be printed by the in-house press. They had bought over $20 million of the worthless paper when the press was ordered shut down along with the rest of the Hong Kong operation. Furthermore, the company purchased in excess of $700 million in Indonesian bonds as recently as October of 1997.

 

Price Waterhouse was brought in to unravel he Peregrine mess and soon found out that its currency guarantees were much more extensive than previously believed with over 2000 trades having 300 counterparties. Pity the poor Thai and Indonesian companies that had the foresight to insure their currency exposure and yet went to the wrong shop to get the job done. It appears that most if not all of these transactions will become invalidated because of Peregrine’s demise and a substantial number of entities that could have weathered Asia’s problems will now disappear from the landscape in spite of having the foresight to hedge their bets. I guess you could say that they made the mistake of going to the wrong bookie. 

 

ANOTHER COUNTY HEARD FROM

 

As the regulatory process proceeded with the speed of a stalactite growing in the desert, Commerzbank of Germany put the screws to everyone by filling a lawsuit against just about everyone in sight charging that these lovable people had taken $41.2 million of the banks money almost simultaneously with closing their doors. In order to get everyone’s attention at an early date, the bank is saying that the directors are responsible and wants discover on the matter commenced as soon as possible. It seems that a number of people are already coming to the conclusion that the powers that be, just don’t want the seamy details of what went on to come out into the open and the Hong Kong Society of Accountants are already into investigating the liquidators, Price Waterhouse. Now that Commerzbank has lead the charge, everyone else will be soon joining in with writs and discovery, thus indefinitely prolonging the transparency that they were seeking. 

 

As the mess slowly began to unravel it was soon apparent that the Indonesian Companies with whom Peregrine was doing business were doing easily as much off the balance sheet as they were on. It now turns out that Peregrine alone had over $9 billion in derivatives written with Indonesian Companies and the popular notion that original number of $80 billion of debt run up by Indonesian Companies will pale in comparison with definitive amount that will come out when the wash is finished. We are convinced that this amount is so large, that banks in both the United States and Japan will suffer repercussions from it lasting decades. And even worse, some of these companies may have been affiliated with Suharto interests and thus may lose their licenses to pillage freely.

 

Many lenders who had been sanguine about getting their money back are now looking at a much different situation as everyone affiliated with the former government is running for cover. What happens now is that some of those financial institutions that were so sanguine about ultimately getting their money back because they knew that if  “push came to shove” the government would step in, are now, we believe, permanently out of luck.  We are convinced that unless a massive cover-up takes place, enormous dislocations will take place in the near future.  

 

ANOTHER PARTY HEARD FROM

 

Just as everyone was finishing digesting demise of Peregrine, C A Pacific Securities was shuttered by authorities. Knowing that this coming so rapidly on the heels of Peregrine, it could likely set off a panic, the government announced a substantial increase in the compensation fund for investors. Worse yet, because of series of rather strange complaints were lodged with Hong Kong Police Department by no less than 1,300 people complaining about weird goings on in their accounts. As the word spread that C A Pacific was using customer cash accounts to prop up their own stocks on margin, this caused a major withdrawal of funds from all of the other stockbrokers in the colony. Part of this problem stems from a lack of cohesive legislation governing borrowings in the securities industry from all sources.   

 

I HAVE AN IDEA, LET’S BLAME THE AMERICANS!

 

Yet China,  the new masters to be, of the Far East determined that the best ploy when you don't know what is going to happen next is to first muddy the waters and then blame everyone in sight for your own problems. Setting the stage for a devaluation in China and the creation of either a new peg or a freely floating Hong Kong dollar, Beijing took off after the United States for purposely generating the miseries that infected the orient. They went on to indicate that a nefarious economic plot was behind all these economic catastrophes and that it was a move by the United States to gain substantially more power over the region. 

 

NO FORCED LABOR CAMPS IN THIS WAR

 

Taking a gold leaf from the Malaysian book of blame, China announced in its "People's Daily Newspaper" on January 6, 1998 that, "By giving help it is forcing East Asia into submission, promoting the U. S. economic and political model and easing East Asia's threat to the U. S. economy. The article's tenor indicated that with substantial fanfare that the United States was attempting to force the Pacific Rim into submission in an economic war far more devious than what the Japanese had visited upon the region in earlier times.

 

In this instance, the United States was economically devastating the region while hiding behind their agent, the International Monetary Fund. China further indicated that the only reason that the United States was willing to help at all was the fact that the situation had become so grim that their was concern among American bureaucrats that without assisting Asia, the United States would suffer from the economic chaos it had wrought as well. Chinese authorities went on to state that the United States had allowed Thailand to sink, but when the contagion spread to Indonesia, Americans became concerned that it too would be drawn into the morass.

 

EVEN JOB WOULD HAVE HAD SECOND THOUGHTS ABOUT THIS

 

And the plagues continued to manifest themselves in the colony. For New Year’s, Hong Kong’s most festive holiday, one traditionally in which chicken is usually served at every family diner; this year will have pig because of the “bird flu” which has already taken a number of lives. People see that as just another omen of what the coming year is likely to bring and instead of the year of the Tiger, they are calling it the year of the pig. Even the usually upbeat, Tung Chee-hwa, Hong Kong’s Chinese administrator said, “The present situation will, I am afraid, continue for some time.” 

 

A HORSE OF A DIFFERENT COLOR

 

Almost in the same breath, but playing to a different audience, on January 16, 1998, Dai Xianglong, Governor of the China’s Central Bank announced the imposition of American Style banking on that country. A trimming down of the fat in the system by decreasing the number of provincial offices, a decreasing role for local bureaucrats and therefore less chance for cronyism, the addition of international asset classification for loans and stepped up right-offs on uncollectable bad debt. Furthermore, the government would give more autonomy to the four state-run commercial banks by allowing them great flexibility within pre-set perimeters. It is interesting that for public consumption, the Untied States is the Devil Incarnate and is using every power at its disposal to subject the global economics, yet the Chinese seem to think behind closed doors that this system is for them. Maybe they want to share in economically subjugating the world. 

 

While Hong Kong is copying American banking practices, in terms of their legal system, politically, they seem to be heading North towards China. China, long a proponent of the old saw that if you are well connected, you can do no wrong, seems to have brought that branch of cronyism to its former colony. Politically connected Sally Aw a newspaper publisher in Hong Kong, illegally inflated the circulation figures for her daily, and in spite of the fact that three of her underlings were prosecuted for fraud, she took a walk thanks to some very influential friends in Beijing.  Simultaneously, Mainland China’s “New China News Agency (Xinhua)  blatantly violated Hong Kong’s long standing privacy statutes. They joined Sally in getting preferential treatment in Hong Kong Courts.

 

UNDER THE NEW SYSTEM, EVERYONE OBEYS THE LAW, THAT IS EVERYONE EXCEPT US

 

The people who saw relatively little change since the Chinese takeover became restive and although Chinese bureaucrats urged calm, the people were not particularly assuaged. The new Solicitor General, Daniel R. Fung, naturally indicated that,  “I would not accept that there has been an erosion in the legal system.”  Other voices did not agree, Martin Lee offered a contrary view when he said, “The fairest conclusion one can draw is that the government has no respect for the rule of law, if today you can treat Xinhua more favorably than others, does that mean that tomorrow you can treat me less favorably?”  Although this represents only a small leak in the dike, many fear that putting a finger in to stop the leak won’t do any long term good to the Colony.

 

This was only the beginning, on March 30th, 1998, the Hong Kong Government announced that they were introducing new legislation that would exempt the government from many current laws. As more information leaked out it seems that not only would the Hong Kong Government be exempt from much legislation but also so would Chinese State bodies. “this...signals the beginning of the substitution of Hong Kong’s “rule of law” with Beijing’s rule of man. The potential from abuse and corruption in these circumstances is enormous and indeed invited, ” stated Martin Lee, head of the Hong Kong Democratic Party. Those who thought the former colony would be left to its own devices are rapidly learning that this is not exactly what the Mainland had in mind.

 

LETS JUST SEE WHAT HAPPENS WHEN WE PUSH THIS BUTTON DOWN HERE

 

But the Chinese were not quite done tinkering with the system. In 1995 when the last Hong Kong vote was held under British Rule, there were 2.7 million eligible voters out of a population of just under 7 million. In first election under Chinese rule, that number had dropped to about 140,000 and the way in which the election was handled created more of an air of resignation than apathy when only a small fraction of that number bothered to go to the polls. Totally disenfranchising and frustrating the population was the bizarre method of voting which divides the country for electoral purposes into three distinct groups, the popular vote will elect 33% of those running, 17% will be chosen by committee having no bearing on how any votes are cast and 50% will be elected by corporations. Pro-democracy politician, Emily Lau indicated that the vote was , “It was a farce. Only a very small number of people had the right to vote. So it was not really an election. It was just a process to entrench power in the people already with a lot of vested interest and vast majority of Hong Kong people have no say whatsoever.” 

 

Emily Lau did not finish just by knocking the Chinese election system, she and another activist thought it would be a good idea to stick it to the Chinese and they had a flower-presentation ceremony at the historic clock tower landmark. They and their supporters laid chrysanthemums in front a hastily constructed mausoleum in honor of all that had died in Tiananmen Square. Emily, ever the orator stated, “They have not died in vain. We will continue to struggle for a democratic Hong Kong and a democratic China.” We have some fears about Emily disappearing sometime soon if she keeps taunting the Chinese. As she herself has stated, it has happened before. 

 

BEFORE THE PARADE PASSES YOU BY

 

So far, the Chinese who were going to let well enough alone seem to have taken away civil rights and the right to vote, pretty good for the short time these fellas have been around. God only knows what the next move will be. As the rights of Hong Kong Citizens are stripped, one at a time, more people seeing the handwriting on the wall are buying one way tickets out of town. “Among the most controversial actions were restrictions the return of children from Mainland China, repealing of labor laws passed under British rule, restricting direct election and placing some China entities above the law.” ([3])

 

Well, the election was held with An announced, huge turnout, the people thrown out by Mainland bureaucrats were elected, promising to halt the erosion of the Hong Kong Citizen’s rights. While many view this as a startling victory for democracy in the former colony, we view it as a prelude to disaster. The next move will be a legislative war over who is really running things and the Colony will lose. This will ultimately lead to repressive tactics by Chinese in order to maintain control. Although we applaud the courage of the dissidents and we feel that they have only begun a long travel over a short road and the best that can be garnered will be some sort of compromise.

 

And worse yet, the economy that had started to become unraveled and the people who under strong economic conditions could have put up with some government hanky panky under good conditions were not in the mood based on what was going on economically. Retail sales dropped 18 percent in February 1998 alone and unemployment soared to a fifteen year high. The smog, which killed tourism last year, is expected to do even worse this year with the bottom dropping out of tourism with arrivals down over 20 percent in May. The budget is in chaos because the Government was forced to suspend land sales because of the collapse of the real estate market which is down 50 percent in just a few months and which contributed a substantial amount of the collections.

 

Due to the fact that so much property is financed through the Hong Kong banking system, fears have already been debated about its ultimate demise. If anyone had any doubts as to the seriousness in which these events were perceived, they only had to listen to China’s designated hitter to understand the facts. Tung Chee-hwa expressed his concern when he said, “Property prices have dropped heavily and if this situation continues it would certainly jeopardize the financial and banking system.”

 

The real estate collapse also means that instead of a surplus of HK $10 billion which had been projected just a short time ago, the actual numbers will come in at a deficit of around HK $21.4 billion. All in all, things are not looking up for the colony, When the data was all in, the first quarter of 1998 showed a contraction of 2 percent and government estimates looked for more of the same to come. Government head, Tung Chee-hwa stated the obvious, “We fully understand that our economic situation now is very critical.”

 

FIRST LET ME TEST THE "FENG SHUI"

 

For a truly Western Style economy such as Hong Kong’s, the people are zealots though when it comes to “feng shui”, the four thousand year old art of predicting the future . Apparently everyone in the former colony is on the lookout for good karma, but according to those revered in the practice of feng shui, things have happened exactly the way they had been predicted. Even Tung Chee-hwa was such a fervent advocate of the science that he would not move into the British Governor’s home claiming that it had bad feng shui. As a matter of fact he would not move anywhere until his own expert picked a place that had good karma.

 

The banks in Hong Kong regularly issue feng shui reports and as an example, Credit Lyonnais Securities Asia issued the following just about the time when the British turned the colony over to China, “People will begin to express their dissatisfaction with the continued deterioration in the local economy and living standards after the hand over.” With so much riding on these predictions, people have been asking when will things get better and almost to a man, the feng shui has predicted that when the new airport opens, things are sure to improve.   

 

FLYING BY THE SEAT OF YOUR PANTS

 

When things looked like they couldn’t get worse because everything bad that could happen already did, a new disaster struck. With great fanfare Hong Kong opened its new airport, the purported, eighth wonder of the world located, on reclaimed land at Chek Lap. So sure were the locals that the new airport would operate as advertised that they took the unusually steps of removing the backup systems which normally would have been kept in place. Effectively, Hong Kong virtually closed the airport that had served them well for so many years and opened a new one simultaneously, the end result became a logistical nightmare.

 

Officials were so sure that they had covered every eventuality that it was not necessary to take the normal precautions of converting flights gradually over a shakedown period to make sure that there were no glitches in the system. Well, they were wrong, were they wrong. The new computer just plain developed “bugs” and wouldn’t cooperate no matter what technicians tried to do. Cargo handling became impossible and goods could not be moved out or into the new $20 billion facility. Escalators didn’t work, toilets were either backed up or in a constant state of overflowing and information displays seemed to be written in Esperanto. This all had the compounded effect of creating interminable flight delays.

 

WHOA

 

Worse yet, an arriving Cathay Pacific Airways plane from France fell victim to a malfunctioning automatic guidance docking system and rammed into an air-bridge when it couldn’t stop in time. Officials became hysterical over the event and canceled the systems use, making it available only manually. This action further backed up the long line of planes waiting to take off and land. It then turned out that the foundation work for the airport’s railroad was substantially inferior to the specifications and before you could blink an eye, four people were arrested and officials were busily out testing the concrete to see if the train was going to fall into the water.   Throwing oil on a smoldering fire occurred when tour operators, looking at the airport as a way to make some money sold tickets to the populous for an in depth review of the facility and they turned out by the thousands straining what little was left of the airports amenities beyond reproach.

 

Much of the cargo that goes in and out of Hong Kong is living, such as live seafood, fresh cut flowers and bull frogs, had to be sent back to the old airport for handling and in the ordeal, much was lost. The passengers fared almost as badly as the order of the day became “hurry up and wait” as long lines appeared everywhere as 80,000 people wondered what to do next. As for the future, the airport’s chief, Anthony Charter seemingly did not check his "feng shui" and stated, “operations were likely to suffer for the foreseeable future and that imports ../../were likely to face 24-hour delays__148.css;. Airports in Macao, Shenzhen and other Southern China were asked to help with the arrivals and for the moment, bad karma abounds.

 

Naturally bureaucrats were searching furtively for a fall guy and Hong Kong Air Cargo Terminals LTD (HACTL) obliged by opening their mouths. You see, HACTL is the company that handles 80 percent of the air cargo going in and out of the former colony. HACTL, after things started going wrong at the airport, reasonably instituted a ban on almost all inbound and outbound air freight traffic and has since indicated that full service could not be restored until at least mid-August, and then, only by reopening the old airport for traffic again. Upon hearing the news, Chau Tak-hay, the Secretary for Trade and Industry stated, “The company should be reprimanded. I’m saying it without reservation, I am very angry, As a citizen of Hong Kong, I feel like every other citizen, very disappointed.” And we can understand where Chau is coming from, Hong Kong handles air cargo valued at HK$40 billion per month and you don’t think that this kind of slowdown isn’t going to cause a real financial problem for a place that already had its hands full, you are crazy.   

 

Many of the problems could be chalked up to Hong Kong’s history of getting everything right for so long that the bureaucrats in charge thought they were be bullet proof. In reality what they did was push the airports envelope by opening it to early, in the first instance to accommodate the one-year anniversary of China’s takeover of the former British Colony and in the second, for Clinton’s visit to the Pacific Rim. Hong Kong is being to show some fraying around the edges.

 

DOING THE UNTHINKABLE

With the news from all corners going from bad to worse, the Hong Kong Government couldn't take it anymore and took a wad of the Colony's reserves and sunk them into the stock market. We are not talking about nickels and dimes here, were are talking about billions of dollars or hard currency reserves. Albert Ho, in speaking for the Democratic Party  put it best when he said that the move was "unwise and unrealistic to attempt to manipulate the market, Hong Kong is a free market and speculation is a part of life."

 

The Hong Kong Government defended its action indicating that currency speculators were spreading vicious rumors about the Colony's economic state of affairs, and indicated that in order to put a stop to the matter once and for all, the government would purchase shares until the cows in order to punish the perpetrators of these actions.  However, unemployment figures released almost simultaneously showed that people out of work rose to historic highs. A public opinion poll also released at the same time showed that peoples patience with the new regime was fraying and that confidence had sunk to a new low since China began its administration. 

 



[1] Wall Street Journal January 27, 1998

[2] Chinese companies list on the Hong Kong Stock Exchange

[3] Reuters, 4/8/98


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