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Concern over the financial position of Hong Kong stockbroking firms has been boosted by the Jan 1998 collapse of CA Pacific Securities. The collapse has led to large client withdrawals, and there are fears that this could hit smaller brokers badly. Officials attribute CA Pacific's collapse to an 'over-concentration of three loans'. However, it has emerged that CA Pacific had transferred shares from cash accounts to margin accounts, and CA Pacific's problems have exposed a weakness in the regulatory system.

Oriental Press Group, one of the largest media concerns in Hong Kong, has claimed that the UK Conservative party accepted a 1 million pounds sterling donation but failed to fulfill the conditions that were attached to the donation. It is believed that the main condition was assistance with the dropping of charges against Ma Sik-chun, one of the founders of Oriental Press. The former Conservative administration in the UK has also been portrayed in a negative light by claims that Oriental Press was betrayed over the establishment of Eastern Express, an English-language newspaper launched in 1994.

Hong Kong-based conglomerate First Pacific is planning to sell a controlling stake in Dutch-based trading concern Hagemeyer and purchase a strategic stake in Philippines food and drinks group San Miguel. Some observers have expressed reservations about this strategy, especially in the light of the financial crisis in Asia, and the company's shares have fallen. Reorganization will reduce financial risk at First Pacific, but it is possible that the company will not necessarily benefit from being associated with San Miguel. Managing Director Manuel Pangilinan is seeking to issue reassurances about First Pacific's strategy.

The Asian financial crisis has led to shares of Hong Kong property developers suffering badly as a result of fears that interest rates must rise to defend Hong Kong's currency peg. Sino Land and Lai Sun Development are perceived as particularly vulnerable, and their shares have plunged due to concerns over their ability to service their debt and interest. However, most of the large developers should escape a credit crunch.

The emergence of economic difficulties in Thailand had a very negative impact on investor confidence in south-east Asia as a whole. The decision by Thailand to allow the baht to float downwards forced most other countries to take similar action, with only Hong Kong managing to keep its currency pegged to the US dollar. It soon became clear that it would be very difficult to come to terms with the structural difficulties that had been highlighted by the crisis in Thailand.

The economic crisis in Asia has so far had only a limited impact on Greater China. However, there are now indications that Hong Kong could be experiencing difficulties. Indeed, it is possible that the pegging of the Hong Kong dollar to the US dollar will be placed in danger. Some observers believe that abandoning pegging would lead to a serious crisis in banking and property in Hong Kong. The Hong Kong government is keen to play down the possibility of such a development.

Hong Kong faces a number of problems such as drops in real estate and stock prices, the emergence of a new type of influenza, and a crisis at an investment bank, Peregrine. Hong Kong has strong foreign exchange reserves, but public confidence is important. The problems of Peregrine could affect this confidence. Hotels and tourism have been affected by fears about the new influenza strain. Hong Kong banks have robust capital adequacy levels, but confidence could be gradually eroded in the crisis.

Hong Kong's financial sector and government are preparing themselves from repercussions from the possible liquidation of Peregrine. The financial secretary, Donald Tsang, does not see a threat of systemic risk, since securities accounts have been covered and provisions have been made for institutions with exposure to Peregrine. Peregrine's problems initially arose from a loan to an Indonesian company called Steady Safe, but other problem loans could emerge.

Confidence in the Hong Kong stock market has been hit by concerns over China's exchange rate policy and fears of an imminent increase in interest rates. Hong Kong financial secretary Donald Tsang said that the near 14% fall in the stock market in the week starting Jan 5 1998 is merely a short-lived turbulence. He also said that Hong Kong would come out of Asia's financial crisis first. Hong Kong seems to have a more stable financial system and economy than other Asian nations which have been hit, but Hong Kong could suffer badly if China decides to devalue its currency.

Hong Kong stock prices are more likely to be affected by events in south east Asia and South Korea than events in mainland China. Hong Kong is still affected by speculation against the Hong Kong dollar in fall 1997. Earnings for companies making up the Hang Seng index may also be flat in 1998. Real estate companies are affected by a downturn, while banks have seen margins eroded. High interest rates will affect the market, and they may remain high if there is concernabout the Hong Kong dollar.

Investors and economists have now turned their attention to the Asian property market, since the performance of the property sector will be a major factor determining how severe the region's economic slowdown is. Regional variations aside, Asian property markets are in a poor state, with rents and capital values falling. Markets such as Kuala Lumpur, Bangkok and Jakarta are expected to see a further deterioration because the supply of office space is forecast to rise by 32%, 71% and 48% respectively by mid-2001.

China took over Hong Kong in Jul 1997, but has been restrained in intervention during the Asian financial crisis. Hong Kong is important as an engine for economic growth, and allowing Hong Kong to have autonomy gives confidence to foreign investors. There are differences of opinion on the extent to which self-censorship operates in Hong Kong. No distributors were found in Hong Kong for two motion pictures about Tibet. Hong Kong's autonomy could thus be threatened from within.

The Asian financial crisis could affect the economic role of Hong Kong in China. The collapse in Hong Kong stock prices has led some companies from mainland China to postpone listings in Hong Kong. Mainland China needs international capital to reform state enterprises, and the future of Hong Kong is linked to its ability to retain a its role in attracting international finance. Speculation is likely to be dampened by the stock price fall, though listings could be resumed.

Guangdong province accounts for around 40% of total exports from China, and economic growth in the province has been strong. It is not clear that such strong growth rates can be maintained. The central government aims to boost economic growth in China's hinterland and western provinces, and this could affect Guangdong. The province benefits from links with Hong Kong, a relatively sophisticated management, and a lack of heavy industry. A new airport has been approved, as has the railroad link from Zhuhai to Guangzhou.

Chinese exports face competition from neighboring Asian countries which have devalued their currencies. Meanwhile, contracted investment has dropped in 1997, though actual investment is likely to rise since tax incentives are due to expire, and investors wish to beat the deadline. Foreign investors are concerned about meager returns, uncertainty about regulations and lack of infrastructure in some hinterland regions. Trade liberalization may be more difficult to achieve if investment drops and trade is hit by devaluations elsewhere.

The current financial turmoil in Asia is expected to produce greater differentiation between Asian policies, economies and attractions for investors. Performances in the equity markets are already becoming more divergent, while currencies are no longer moving in a synchronized fashion. The strength of the financial sectors and how governments respond to the crises are expected to be the most significant factors in differentiating Asian economies.

A strong bond market would play a valuable role in balancing out the power of local banks in Asia, thus boosting the region's financial stability. At present, banks are the main source of finance for most corporate borrowers, and this means that there is a danger of assets expanding to unmanageable levels. Some observers believe that the financial crisis in Asia will force governments to develop bond markets and the appropriate institutional supports.

The Asian financial crisis has led to a drop in activity levels in most markets as initial public offerings have been postponed and bond and stock trading volumes fall. This has led many investment banks to cut costs. Peregrine is shedding jobs and BZW is closing its equities division in Japan. Bonuses are likely to drop sharply, but there is optimism about the market over the longer term. Some banks could take a longer term view about cost cutting, but all will face pressure over the short term.