Hong Kong Stock Crisis Sets World Markets Tumbling

NEW YORK —  A stock-market panic in Hong Kong rippled worldwide Thursday, dragging down share prices on exchanges in Japan, Europe, Latin America and the United States.

The Dow Jones industrial average slid 186 points, or 2.3%, to 7,847.77 on the third-biggest trading day in New York Stock Exchange history as investors feared that America’s biggest multinational firms would be hurt by an economic slowdown in Asia.

In Hong Kong, a currency crisis and surging interest rates sent the benchmark Hang Seng index down more than 10%.

The latest free fall--which put the Hang Seng down more than 30% this month and off nearly 40% since early August--presents the first major financial crisis for Hong Kong’s new Chinese rulers and sparked fears that economic problems throughout the region could worsen.

Experts predict that prices of Hong Kong’s famously overpriced real estate will soon collapse, triggering problems with huge banks and landholders who are cornerstones of the former British colony’s economy.

In midday trading today, however, the Hong Kong market staged a rebound, with the Hang Seng index up 459.69 points, or 4.4%, to 10,885.99.

Still, many other Asian markets continued to decline today, and some veteran investors said Hong Kong shares remained vulnerable to more selling. Chinese Central Bank officials said today that Beijing would respond if Hong Kong’s monetary authorities asked for help.

Unlike Hong Kong, the damage on Wall Street was moderate Thursday. In fact, even as the U.S. stock market tumbled, investors poured money into ultra-safe U.S. Treasury securities, making for the best day on the bond market in more than a month.

Some analysts predicted that this “flight to safety” could ultimately benefit U.S. stocks as well.

That was by no means a unanimous opinion, however.

“This is the end of equity mania,” declared Michael Metz, chief equity strategist for Oppenheimer & Co. and, lately, one of Wall Street’s leading pessimists.

Metz said an economic downturn in Asia would pinch the sales and profits of U.S. companies, making it plain to all that their share valuations are unrealistically high.

“Cash and bonds will outperform stocks well into the next year,” he added.

The stock market has confounded such experts again and again over the last two years, though. Pullbacks of nearly 10% in the Dow in the summer of 1996 and again last spring led to predictions that the seven-year bull market had finally ended.

Yet every setback so far has been answered with a rebound, as investors took to heart the stock broker’s mantra that a market dip is a buying opportunity.

“Maybe this is the test of whether it’s ordained forever that every fall must produce a gain,” said David A. Rolfe, chief investment officer of Wedgewood Partners, a St. Louis money-management firm.

At Boston-based Fidelity Investments, the largest mutual-fund firm, phone call volume was just slightly greater than normal Thursday, a spokesman said.

There were net redemptions of international funds--meaning investors pulled out more money than they put in--but much of the money was transferred to Fidelity money-market funds and so stayed “in house,” the spokesman said.

The current Asian crisis of confidence was triggered by the July 2 devaluation of Thailand’s currency, which spread to its Southeast Asian neighbors as speculative attacks by currency traders forced them to devalue too.

The devaluations led to falling stock prices in many Southeast Asian markets, which in turn triggered expectations of lower economic growth.

Thursday’s Hong Kong carnage was set off by fears that the Hong Kong dollar was next to fall. The government’s vow to defend the currency’s peg to the U.S. dollar sent interest rates soaring, and investors fled.

Hong Kong’s status as a financial center and a gateway to the huge Chinese economy helps explain why investors globally reacted with such alarm, whereas they had shrugged off financial crises in other parts of the region.

“Hong Kong is not really an emerging market, it’s a developed market,” said Jean-Marie Eveillard, who manages the SoGen International Fund.

What’s more, Hong Kong’s sky-high real estate prices raise the specter of a Japan-style downward spiral of a crashing stock market and crashing property prices.

For whatever reasons, the plunge in Hong Kong stocks Thursday--with the Hang Seng index down 16% at one point before rebounding to close down 10.4% for the day--started a wave of selling in other stock markets.

“What happens when contagion occurs, is one market gets hit badly and there’s a ripple effect,” said Tim Condon, an economist at Morgan Stanley Asia in Hong Kong.

Japan’s key stock index fell 3.1%, extending its loss for the year to 11%, while the key indexes in Manila, Kuala Lumpur and Singapore all closed at four-year lows.

The slide spread to Europe, where Britain’s FTSE 100 index dropped 3.1%, France’s CAC 40 index was off 3.4%, and Germany’s DAX index fell 4.7%.

In Brazil, the main share index lost 8.2%. Mexico’s main share index closed down 4.5%.

As the sell-off traveled westward, it picked up monikers such as “Red Thursday” and “the Hong Kong flu.”

In Chicago, where futures and options markets open well ahead of the stock market in New York, selling pressure built to such a point early Thursday that it looked like a blood bath was in the offing.

As the New York Stock Exchange prepared to open, traders were buzzing about the possibility that, for the first time, a half-hour “circuit breaker” halt in trading could be triggered if the Dow dropped 350 points.

The circuit breakers--meant to give the market a cooling-off period--are a reform instituted after the 508-point, 22% Black Monday crash of Oct. 19, 1987.

But the feared debacle never materialized. At its worst, the Dow twice fell nearly 230 points before crawling back upward.

On the New York Stock Exchange, declining stocks outnumbered gainers by a 4-1 margin.

Treasury Secretary Robert E. Rubin said U.S. officials have contacted their counterparts in Southeast Asia and are monitoring the situation, but they see no reason for it to hurt the American economy.

“We obviously have been focused on financial issues in Southeast Asia for many, many months, and we remain focused on those issues,” Rubin told reporters after a speech at the U.S. Chamber of Commerce.

“As long as we get our [economic] fundamentals right, the United States will be just fine,” he added.

“At the end of the day, the Hong Kong problem is a Hong Kong problem,” agreed Marshall Acuff, market strategist for Smith Barney. “I don’t see an impact of any significance on the U.S. economy.”

Some analysts said the Asian meltdown could cause more investors to put their money into Wall Street as a relatively safe haven.

“It’s my personal opinion, and a dark scenario, but all the capital and resources may go to the New York market, since that’s the only place to go,” said Ioka Ko, an analyst at Yamaichi Research Institute in Tokyo. “Then New York stocks would keep going higher, and maybe crash later on.”

For now, some veteran investors believe that Hong Kong shares are indeed headed lower, today’s rally attempt notwithstanding.

Mark Mobius, who manages $15 billion in emerging market stock funds, told Bloomberg News that he believes the Hong Kong stock market will fall another 20% before its slump ends.

“We probably have another 20%, 25% to go, if you look at what the history is in these markets,” said Mobius, managing director of Templeton Asset Management Ltd.

Mulligan reported from New York and Holley from Tokyo. Etsuko Kawase of The Times’ Tokyo Bureau and Times staff writer William D. Montalbano in London also contributed to this report.

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Market Rumblings

A stock sell-off began Thursday in Hong Kong, the spread to other markets. A rally early today in Hong Kong erased some of the loss, but volatility in Asian markets is likely to continue.

Thursday’s Percentage Drops

Hong Kong: 10.4

Tokyo: 3.0

London: 3.1

U.S.: 2.3

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Hong Kong’s Collapse

Thursday’s fall was the largest one-day drop in Hong Kong’s history.

Market high / Aug. 7, 1997: 16,673.27

Oct. 23, 1997: 10,426.30

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Circuit Breakers

After the crash on Black Monday, Oct. 19, 1987, the New York Stock Exchange adopted safeguards designed to slow a market fall. The first two circuit breakers were used Thursday; the last two have never been triggered.

50-point Dow index gain or loss from previous day’s close: Computer-program trading limited.

100-point drop: Further curbs on computer-program trading.

350-point drop: Trading stopped for 30 minutes.

550-point drop: Trading stopped for 1 hour.

Not further curbs below this point

Source: New York Stock Exchange