Hong Kong’s Hang Seng index grew from
15,000 to nearly 21,000 in the past year, but has now abruptly plunged almost
10%, back to 18,800.
Analysts attribute the Hong Kong decline
to a 9% drop on the Shanghai stock
market, that market’s biggest fall in a decade. The Shanghai
collapse appears to have triggered sell-offs in markets worldwide. Wall Street
lost more than 500 points, the FTSE fell more than 300 points and Japan's
Nikkei surrendered all the gains it had made since the turn of the year,
falling back below 17,000 today.
It is widely believed that the global market collapse resulted from a plunge
in the relatively small Shanghai market, yet it should have been an
insignificant event as Shanghai is a tiny, illiquid market, accounting for a
mere 2% of global markets. Why did a sell-off in Shanghai set off a global sell-off?
In fact, the sell-off could have been triggered by a drop in any market
almost anywhere in the world. The world’s speculators, leveraged at 20 or even
50 times their capital, must liquidate fast to avoid even a small retrenchment
in asset prices in other markets. And what gives speculators such power to
leverage? The deluge of fiat money flowing from central banks everywhere.
Printing-press money begets wild speculation. It begets gambling.
I did a bit of recreational gambling myself in Hong
Kong a quarter century ago. I spent a pleasant day at Hong
Kong’s beautifully-tended Sha Tin race course with a Chinese
friend, daughter of a Hong Kong billionaire. At that
time Hong Kong was still a Crown colony of Great Britain, and wasn’t destined to be turned
over to communist China
for another 15 years. Profoundly affluent, Hong Kong was
a beehive of entrepreneurial activity and freedom, boasting more Rolls Royce’s
per capita than any other country in the world.
What a contrast it was to mainland China at the time.
Traveling to contiguous Guangdong
by train, we passed through a 20-foot tall electrified, floodlighted fence
separating the two nations. It was clear that China’s
problem was keeping its population from escaping. For thousands of miles in
every direction, China
was destitute, imprisoned in the jaws of the communist dragon. Canton
(now Guangzhou)
was a vast drab city devoid of private vehicles, flooded with identical black
and white bicycles, and a colorless population dressed in Mao jackets. The
lands outside the city were still being ploughed with water-buffalo power. Inside
cities, construction, from roads to buildings, was done with mechanization…all
was hand labor.
Dire predictions were made about the fate of Hong
Kong once China
reclaimed it, and a large number of rich Hong Kong residents took their wealth and fled before the 1997
Few of us foresaw that instead of China turning Hong Kong into a replica of communistic poverty,
it would be China
that turned around and began to emulate Hong Kong. The
resurrection of China
in little more than two decades is a testimony to the latent power of human
initiative if given even a modicum of freedom.
