Hong Kong stocks, hammered yesterday by currency and interest rate fears, suffered their heaviest one-day loss this year as investors opted out and analysts said they saw nothing that could stop the slide.
The blue chip barometer, in its fourth largest fall ever, plummeted 765.33 points, or 6.17 per cent, to close at 11,637.77 - a 13-month low.
Hong Kong had originally defied the turmoil that has swept south-east Asian equity and currencies markets since July, but the equities rout has now swept Hong Kong. "The market is in a state of liquidation because of financial pressures, and any support level is getting short shrift," said Mr Chris Roberts, regional technical strategist at HSBC James Capel.
"There's more downside, to as low as 10,000 or lower," said Mr Antony Burbee, Asian equity specialist at Dresdner Kleinwort Benson.
Interbank lending rates jumped well above the local prime rate this week, driving the stock market to close at a 13-month low - just a whisker above 11,636.13 on September 26th, 1996.
In London, Hong Kong chief executive Mr Tung Chee-hwa said yesterday interest rates may need to rise to defend the Hong Kong dollar's long-standing peg to the US dollar.
Asian currencies have dropped sharply against the US dollar since July and Hong Kong is today the only major Asian currency pegged to the US dollar.
"In the process of defending the (Hong Kong) dollar, interest rates may have to go up," Mr Tung said at the Royal Institute of International Affairs.
He said Hong Kong would defend its currency and would not pursue competitive devaluations seen elsewhere in Asia.
Hong Kong had $85 billion in reserves at the end of August - the fourth biggest in the world - and Mr Tung said the strong reserves would help bolster confidence in the Hong Kong dollar. China has an additional $132 billion in reserves.
Brokers said Asian equities and currency woes seemed to have reach the shores of the capitalist outpost on the south China coast. "Blue chips have caught the Asian 'flu," said Ms Janet Gillies, sales director at OCBC Securities. "We knew red chips were over-valued but now people are selling the good stuff."
The market was on a wild ride throughout the day. After falling 650 points, bargain hunters jumped in and drove the Hang Seng Index back briefly into positive territory and a mid-morning high of 12,412.43.
But the dramatic reversal was short-lived. Frantic afternoon selling put shares in a free fall, with investors worried that banks would raise their prime rates at their routine Friday meeting, tomorrow.
Most Hong Kong inter-bank rates (HIBOR) have been at high levels this week. HIBOR rates shot up to 12 per cent shortly after the market closed, after staying at a high of about 10.5 per cent for most of the day.
China-related shares fared the worst. The red chip Hang Seng Index China-Affiliated Corporation Index plunged 304.88 points, or 13.09 per cent, to close at 2,024.91.
Heavy damage to red chips in recent days has led to gloomy predictions for the debut of China Telecom (Hong Kong) in Hong Kong today, with analysts predicting it will trade below its HK$11.68 issue price.
