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Web-only Exclusives
November 30, 2000

From Our Correspondent: Hirohito and the War
A conversation with biographer Herbert Bix

From Our Correspondent: A Rough Road Ahead
Bad news for the Philippines - and some others

From Our Correspondent: Making Enemies
Indonesia needs friends. So why is it picking fights?

Asiaweek Time Asia Now Asiaweek story

A NEW COURSE

The Crisis is fast expanding the state's power in the economy and recasting Asian capitalism

By Ricardo Saludo


Donald Tsang vs. the hedge funds

Lee Hsien Loong Singapore's DPM speaks out

George Soros favors some curbs

After Intervention Hong Kong is still a free market

Investors All Managing the people's portfolio

Ties That Bind a reassuring interdependence

The End Beijing allows GITIC to fold

IT WAS NOT THE SORT OF THING investors allergic to official meddling cheer about: the government's planned takeover of several banks in a major industrial economy. But on Oct. 12, global markets applauded Tokyo's approval of a long-overdue rescue package worth $500 billion for financial institutions crumbling under tens of trillions of yen in bad loans. Under the scheme, if a bank's capital falls below 8% of its risk assets, the recommended minimum for institutions doing business abroad, the state would either lend money to it, buy its shares - or nationalize it.

In Hong Kong, meanwhile, the government is smiling broadly as the Hang Seng stock index rose above 9,000 last week. That's up about 13% since authorities bought up its component shares in a bid to foil speculators. In early August, hedge funds had sold index-linked futures contracts while attacking the Hong Kong dollar in a bid to force interest rates up. That would have depressed the stock market, leaving the speculators with fat profits from selling the Hang Seng before it fell. But Financial Secretary Donald Tsang Yam-kuen had seen that double play before in October 1997. Instead of jacking up lending rates, Tsang used the reserves both to buy off hedge funds dumping Hong Kong dollars and to purchase Hang Seng stocks, lifting the index.

With mounting losses in currency and futures markets, the attackers eventually took flight. There has been no major assault on the Hong Kong dollar since, and interest rates have receded. Now that the Hang Seng has recovered, the government stands to make hundreds of millions of dollars on its stock portfolio. "We have been shown as the icon of free trade, and that icon has been smudged," Tsang says of the speculative attack. "We had to remove that smudge." Will the government intervene again? "We have no intention - as long as there is no double play," the secretary told Asiaweek.

Daim Zainuddin, Malaysia's economic czar, also has some heavy-handed moves to explain: Kuala Lumpur's currency restrictions which shield its ringgit from attack as it tries to reflate the economy. "They have enabled us to concentrate on the domestic recovery," Daim said in written replies to questions. "Interest rates have come down and liquidity levels have been enhanced." The government has also undertaken billion-dollar rescues of banks and well-connected groups like Renong.

On Oct. 14 the Keidanren, Japan's main business federation, declared: "We in Japan strongly support the currency-control measures adopted by the Malaysian government" as necessary to stabilize the economy. Of such endorsements from abroad Daim said: "There has been an encouraging opinion among international economists who see that some controls are needed by developing countries, given the turmoil we all face."

As the Asian Crisis bites deeper, capitalism in the region is struggling to reconcile its free-market aspirations with the reality of increasing and indispensable state intervention. From bank rescues and market forays to currency curbs and social safety nets, official involvement in economic activity is reaching levels not seen for at least a decade. The dichotomy has marked recent meetings, from the World Bank-International Monetary Fund sessions in Washington to the ASEAN economic ministers discussions in Manila and the World Economic Forum East Asia summit, which convened leading figures in business, government and academe in Singapore. Asked about Malaysia's currency controls, Philippine President Joseph Estrada told the Singapore meeting: "Each ASEAN member has to cope with its own circumstances. But our long experience of controls only led to corruption and the black market. We won't have them."

Meanwhile, Asia's openness to global money flows, which is in fact just several years old for most of the region's economies, is increasingly under question. What Asia does to cope with the giant waves of world capital, from currency controls to curbs on hedge funds, could influence the rest of the capitalist world. Noting the challenge posed by global financial turmoil to the free-market paradigm Tsang says: "We are in a very crucial juncture in economic evolution of modern history."

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