The Hong Kong market plunge

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.

 

Comments

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