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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

THE WARM NORTH WIND

A troubled Hong Kong welcomes China's friendly, not intrusive, hand

By Susan Berfield


Struggle Asian capitalism searches for a new paradigm.

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

The End Beijing allows GITIC to fold

BEFORE HONG KONG'S REVERSION to China in July last year, many people worried that communist Beijing's invisible hand might hamfistedly strangle the capitalist golden goose. Today, they may be more worried it is keeping its hands off as promised. Fifteen months ago, Hong Kong was in fine form: the stock market index was over 14,000 and a private home changed hands for a record $71 million. As long as Beijing didn't interfere in Hong Kong's business, many said, it would be business as usual. The good times sank, though, as the Asian Crisis flowed into Hong Kong's harbor. The market crashed, property prices plummeted and people lost confidence. Some began looking toward the stronger economy and firm leadership up north.

Beijing has been more restrained than many expected and less aggressive than many feared - yet the influence wielded by its mere presence has been growing. Its limited involvement in Hong Kong's mid-August stock market rescue operation is a perfect example. After Hong Kong's 10-day, multi-billion-dollar intervention, everybody asked the obvious: Did Beijing push Hong Kong's free marketeers to act? Financial Secretary Donald Tsang says Beijing gave moral support and stood firm on the renminbi exchange rate. But that's it: "Beijing had no role. No coordination. There was no need for consultation. We did it on our own." Democratic Party leader Martin Lee first said he suspected Beijing had ordered the intervention; several days later he retracted the accusation, saying he had no proof. There is evidence, though, that the reality was a little different than Tsang describes it. And many in Hong Kong will probably find some comfort in that.

Tsang's story begins on Aug. 13, as he, Monetary Authority head Joseph Yam and Secretary for Financial Services Rafael Hui held an overnight meeting with Hong Kong Chief Executive Tung Chee-hwa. The four agreed to intervene the next trading day. "We informed the central people's government hours before we announced entering the market on Aug. 14," says Tsang. "I expected them to support us, because it was for the stability of Hong Kong, and quite naturally full support was expressed immediately afterward." And just how did Beijing express itself? Li Yihu, director of Peking University's international relations department, says Premier Zhu Rongji basically told Hong Kong authorities that should they request it, "the center will provide support at whatever cost and through whatever means."

First the money: Well before the handover in 1997, Beijing began to prepare for possible raids on the Hong Kong dollar by international speculators. It was generally believed to have set aside $15 billion of its $140 billion foreign reserves for that task. Beijing offered Hong Kong some of this - most believe about $5 billion - for the August intervention. It was a symbolic gesture: Hong Kong's $96.5 billion in foreign reserves were ample. Liu Jinbao, a Hong Kong-based Bank of China official, told Asiaweek that China was also prepared to buy into Hong Kong shares if requested by the government. "China was ready to invest part of its foreign reserves in Hong Kong shares," he says. "But since Hong Kong did not ask, no action was taken." Afterward, market sources said Beijing decided to hold another $10 to $15 billion of its reserves in Hong Kong dollars to support the currency more directly.

Many investors also heard that the People's Bank of China (China's central bank) sent two advisers to Hong Kong to help map out tactics during the 10-day intervention. The two experts, it was said, had formerly worked on Wall Street, were comfortable with derivatives and well-informed about hedge-fund operations. Peking University's Li says he heard that two vice governors of the People's Bank were sent to Hong Kong during the intervention. Wang Li, executive director of China's Stock Exchange Executive Council, says it would have been logical to send Liu Mingkang, a vice governor familiar with international banking. So far no one in the know will confirm this. But it fits Zhu's modus operandi, says the head of Daiwa Securities in Beijing, Ted Tokuchi. Dispatching advisers to facilitate communication between Beijing and Hong Kong is a tactic the premier would use.

Some insiders further speculated that Beijing warned U.S. brokers trading on behalf of major hedge funds to stop aiding the attacks on the Hong Kong dollar, or risk jeopardizing their business in China. Wang Li says: "Foreign investment banks must take a high-profile route [deal with China's political elite] to gain access to mainland markets. So they would be more prone to heed calls from Beijing." But, again, whether or not Beijing used its clout with international moneymen is unclear.

What we do know is that in August the leaders in Zhongnanhai were, at the very least, watching Hong Kong very closely. President Jiang Zemin, Zhu and Vice Premier Qian Qichen were briefed by Chinese central bank officials on the details of the intervention in a special meeting on Aug. 28. They said the operation was essential to safeguard Hong Kong's economy and the interests of its people. Zhu even said that the battle would "sharpen" the Hong Kong authorities' "skills and ability." But he also wanted to let people know that Hong Kong's "two unchangeables" - the dollar peg and the free-market economy - were still just that. It is another irony of Asia's economic confusion that criticism of Hong Kong's move (however temporary) away from strict free-market principles comes not just from foreign investors but from China too. Wang of China's Stock Exchange Executive Council argues that Hong Kong's authorities set a bad example. "I don't feel comfortable with the level of Hong Kong's intervention," she says. "It has certainly established a [negative] precedent."

Beijing's economic influence in Hong Kong of course was growing long before the Crisis or even the hand-over. China is Hong Kong's biggest investor, its major manufacturing base, and an increasingly important market, particularly now that growth has slowed in so many other places. State-owned and China-backed companies form a large portion of Hong Kong's stock market. All that gives China clout. Sometimes that clout has been welcomed - like when Beijing said more mainland visitors could enter Hong Kong and buck up the moribund tourist industry. Sometimes it has caused concern - particularly when the occasional Hong Kong businessman asks a little too explicitly for the center to lend a helping hand.

While Beijing's renewed attention surrounding the intervention has raised some concerns, few are arguing that the capital should not keep at least a close eye on the Special Administrative Region. And that is just fine with many in Hong Kong. Those who once believed that Hong Kong had to be protected from Beijing now hope China can help save Hong Kong. But even a full-fledged alliance is not necessarily invincible. As Zhou Bajun, China research director at Sun Hung Kai Investment in Hong Kong, says: "What Hong Kong needs badly are good fundamentals, not good war partners." In other words, China can only do so much.

- With reporting by Law Siu-lan/Hong Kong, David Hsieh/Beijing, and Sam Gilston/Washington


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