The battered financial markets in south-east Asia were swamped by a wave of selling for a second day yesterday, with foreign investors rushing out of the region.
Share prices plummeted to record lows and currencies weakened further against the US dollar. As loss of faith in Asian markets spread, the Hong Kong stock market, which had largely survived the crisis over the past eight weeks, has had its worst two days in years. Even the fundamentally strong Australian bourse came under pressure.
Stock market analysts blame the crisis on fears of rising interest rates and slowing economic growth in south-east Asia, factors which have been undermining the markets since the Thai baht was devalued on July 2nd.
The rising US dollar has also affected economies relying heavily on outside borrowing, which were forced to increase interest rates to defend their currencies. This has exposed underlying weaknesses in Asia's breakneck economic development, including massive bank loans for property development which has given many Asian cities a glut in office space.
Financial observers put the immediate blame for the last two days of turmoil on Malaysia, where officials tried to curb short-selling after Kuala Lumpur stock prices tumbled to the lowest levels in four years. Malaysian prime minister, Dr Mahathir Mohamad pointed the finger at "foreign rogues" for his country's woes. Short sellers borrow a stock and sell it, planning to buy it back at a lower price and return it to the lender.
The restriction on the sale of major stocks in Malaysia went against basic market-economy rules and accelerated the flight of funds from Asia, said Mr Yogaku Iwamoto, a Japanese financial expert. "Even those who had been taking a wait and see stance decided to flee Asia." The Malaysian ringgit fell to a 24year low on Thursday as concern rose over a serious current account deficit and growing inflationary pressures. The market and the media have not been convinced by last week's $16.6 billion (£11 billion) International Monetary Fund bail-out of Thailand where the baht has plunged 25 per cent since early July, according to the Asian Wall Street Journal.
An IMF official in Singapore said foreign exchange reserves in Thailand would not fall to a "dangerous low", but Thai stocks have now had a losing streak of 11 straight days.
In the Philippines, the market saw its largest one-day loss in 10 years on Thursday as foreign investors scrambled to sell after more bad news on the economy.
The Philippines has also broken a longstanding link with the US currency, hitting hard foreign investors who use the US dollar as their currency. In dollar terms, Thai stocks have fallen by more than 70 per cent this year and Indonesian, Singapore, Malaysian and Philippine stocks by between 22 and 32 per cent. Despite its solid economic base, Hong Kong could not escape the market turmoil in Asia with the Hang Seng Index falling 657 points on Thursday and a further 502 yesterday.
Despite the crisis, a record price of $716.8 million was paid for a waterfront site in an exclusive neighbourhood on Wednesday, temporarily calming the jittery market. But it could not save Hong Kong from the destructive loss of confidence in the region's stocks which the South China Morning Post, published in Hong Kong, blamed squarely on Malaysia's decision to ban short-selling of 100 key stocks. It said the territory was unlikely to be able to escape the fall-out as funds shy away from the region but, providing there was no panic-selling by local investors, the effect should be short-lived.
However, Hong Kong equities felt the full force of the region's financial crisis with evidence of funds being liquidated to meet redemptions and foreign and domestic investors panicking and dumping shares to cut their losses. Credit Suisse First Boston head of equity trading, Mr Richard Verin, said: "There's a limit to how much Hong Kong can take when the rest of the region is melting. The fund flows out of the United States are not good and we know there have been redemptions."
The Hong Kong dollar remained stable against the US dollar, to which it is pegged, as the week progressed but financial traders said the renewed weakness in south-east Asian currencies could bring new pressures. A renewed attack on the HK dollar could drive up interest rates.
In China, defying concerns about an over-supply of real-estate, ground was broken this week for construction of the world's tallest building. The 460-metrehigh structure is being built in Shanghai over four years by Japanese developer, Minoru Mori.
The currency and stock market crisis is being watched anxiously in Beijing, where the Government is apprehensive that a stock market crash could set back its whole economic reform programme, as happened in October 1987 when world markets collapsed.
"Such a development would strengthen the view of the opponents of reform that stock markets are a bad thing," said a western financial expert in Beijing. "If there is a bear market in Asia, outside investors will pull out because the fundamentals are quite poor. Reality catches up. That's what happened in Thailand."
