Hong Kong has heaved a sigh of relief after stocks recovered 718 points yesterday, or 6.89 per cent from Thursday's crash, demonstrating to the world that Hong Kong may be, as it has always claimed, different from the lessstable economies of south-east Asia.
Yesterday's rebound, the second largest points gain in the history of Hong Kong's Hang Seng index, followed the market's 1,200 point plunge on Thursday. That collapse in share prices shattered the confidence of investors and dragged down stock prices across the globe.
The partial recuperation of losses - the market is still 25 per cent weaker than at the beginning of October - means that the former British colony has survived its first serious crisis since it became a Special Administrative Region (SAR) of China in July. The administration of chief executive, Mr Tung Chee-hwa, is being credited with keeping cool and resisting pressure to break the Hong Kong dollar's 14-year-old link with the US dollar.
Removing the peg to the US dollar would have left Hong Kong at the mercy of speculators and its currency worth a lot less, said Mr Walter Walker of South China Brokerage. This would have been unthinkable, as it would shake the confidence in the territory and set a bad precedent.
Financial Secretary, Mr Donald Tsang, succeeded in forcing speculators to back off at the end of a week when the rush of capital out of the Asia-Pacific region finally hit Hong Kong. He did so by raising interest rates precipitously and making absolutely clear the SAR`s determination to maintain the rate of HK$7.8 to one US dollar.
Mr Tsang, a career civil servant with more than 30 years experience, carries much weight in financial circles and when he said on Thursday afternoon that Hong Kong had "absolute determination" to defend the currency, investors and speculators took note.
The Hong Kong authorities were helped by supportive noises from China where the Central Bank said yesterday it would respond if Hong Kong's monetary authorities asked for help. But otherwise Beijing kept out, underlining the SAR's independence as an economic and financial power in the region. Hong Kong has US$88 billion in reserve to defend its currency.
Brokers in Hong Kong said they were still uncertain about the short-term direction of the market. "The market can't discount all this (currency uncertainty) in one day," said analyst, Mr Kelvin Tang, at Impac Asset Management.
The rally was prompted by both fundamental improvements in the investment scene and purely technical factors, both of which could reverse at any time, analysts said.
It was helped by companies buying back their own shares. The market reversed course as news filtered through that lending rates in the interbank markets (HIBOR) were falling while the dollar remained strong. Yesterday evening, the Hong Kong overnight rate had fallen to 10 per cent from 50 per cent in early morning trading, and down from the 250300 per cent earlier in the week.
The Hong Kong dollar came under attack this week after the Taiwanese government decided to end its defence of the currency and let the new Taiwan dollar fall to a 10-year low.
It was the latest to fall in a long and painful realignment of Asian currencies which began when the Thai baht was forced to break its link with the US dollar in July. Since then the currencies of Thailand, Malaysia, Indonesia and the Philippines have all lost ground.
Some investors said however that, while Hong Kong's financial system is more mature than others in the region, they would wait for more evidence that the peg would hold before investing in Hong Kong. Some analysts felt that the currency would eventually have to devalue.
