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Despite Strong Fundamentals, Hong Kong Stocks Still Fall

By Keith B. Richburg
The Washington Post

It was another bleak day at Exchange Square, Hong Kong's equivalent of Wall Street, where the second severe financial downturn in less than a week swamped local traders and sent ripples through markets around the world.

Once again, stock prices tumbled, and while Monday's six percent drop in the Hang Seng Index was less precipitous than Thursday's 10-percent slide, this time some of the territory's best known blue-chip companies were among the casualties. Hong Kong's financial secretary, Donald Tsang, made another spirited defense of the local dollar's peg to the U.S. greenback and vowed that speculators betting against the currency "will be burned." And, market analyzers were left reeling, shaking their heads at the sudden downturn that all but wiped out Friday's seven percent rebound.

"What a day!" said David Robinson, who manages a local hedge fund, sounding weary at the end of a trading session that saw his own portfolio plummet. "It's just so unpredictable. It's just depressing. It's very, very worrisome what's happening - it's a signal that things are starting to break down in Hong Kong. There's a huge amount of volatility and uncertainty."

A market analyst who asked not to be named said Monday's performance by the Hang Seng - which dropped more than 688 points, to end the day at 10,475 - was an example of investor irrationality. He said: "A lot of this denies economic reality, and it becomes a flow-of-funds situation. It's very hard to swim against the tide."

The economic reality is that Hong Kong, unlike its Southeast Asian neighbors whose economic difficulties fueled the stock slide, is in sound financial shape - a point Tsang hammered home in a speech Monday at an international investment conference. Hong Kong has $80 billion in foreign currency reserves, no public-sector debt, a huge budget surplus, low inflation and an unemployment rate of slightly more than two percent.

"Four months ago, one chapter of Hong Kong's history closed," said Tsang, referring to the shift of territorial control from Britain to China. "I can assure you that the chapter we have now opened is not Chapter Eleven."

"Hong Kong is not any other Asian economy," Tsang declared, vowing that Hong Kong, unlike its neighbors, had no need to float its currency. "We will not change our system or our dollar link."