A GLOBAL ECONOMY October 28, 1997 NEWSHOUR TRANSCRIPT

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The instability of Asia's stock markets has caused world wide market fluctuations, illustrating the extent of how global the world economy has become. After a background report by Steve Levinson of Independent Television News, Margaret Warner talks with two international financial advisors for a closer look at the Asian markets.

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A RealAudio version of this segment is available. NEWSHOUR LINKS: October 27, 1997 The U.S. stock market continued to slide with its largest single-day loss. October 23, 1997 A 10 percent drop in the Hong Kong stock market makes investors uneasy. October 20, 1997 Phil Ponce talks with Michael Zielenziger of the San Jose Mercury News about the dynamics of Southeast Asian economies. August 15, 1997: Economists explain the day's stock market plunge. March 31, 1997: Paul Solman looks at what makes the stock market move. Browse the NewsHour's coverage of business, economy and Asia. OUTSIDE LINKS Stock Exchange of Hong Kong New York Stock Exchange

STEVE LEVINSON: The world's markets are hoping that Wall Street has tonight stopped the rut. In London, Europe's leading financial center, it was a day of extraordinary swings. A start of 4841 points, a collapse of over 400, and then on the back of Wall Street a steady recovery. At first seemed that a crash on the scale of 1987 was on the cards. 80 billion pounds was wiped off the value of UK companies. It was a huge knee-jerk response to falls elsewhere but also to some extent a recognition that share prices had risen too far, too fast in recent months.

A correction, not a crash.

BRONWYN CURTIS, Investment Banker: This is a real correction, rather than a crash. This market has been going up in a straight line almost, like a rocket ship all year, and a lot of people have been saying for some time the equity markets are overvalued, particularly the U.S., worried about it, but nothing actually to trigger a downturn. Now, actually Hong Kong has really triggered the downturn.

STEVE LEVINSON: In Hong Kong it had been another day of calamitous falls. Hong Kong's investors are still being buffeted on all sides. The currency's under pressure; interest rates are rising, and the property boom on which many shares depend seems to be a thing of the past.

JAMES OSBORN, Investment Banker: Because of the magnitude of the fall people get scared. And today was bad by no doubt the imagination. And I think, you know, we really are--I do think that what we've seen last week and this week really had much more severe consequences than ‘87 or Tiananmen Square ever did.

STEVE LEVINSON: The Hang Seng Index went down and down all day. It's the one market where so far there's little to encourage a belief that an end is in sight. In Hong Kong they don't debate whether this is a crash or a correction; they know their markets have already crashed. Tomorrow at least can hardly be worse.

JIM LEHRER: Margaret Warner picks up that story.

MARGARET WARNER: And now for a closer look at the Asian markets, where this all started, we're joined by Nariman Behravesh, chief international economist at Standard & Poor's DRI, an economic data analysis and consulting firm in Lexington, Massachusetts; and Mary Bush, president of her own international financial advisory firm, Bush & Company, in Washington. Mr. Behravesh, why do you think we saw such a precipitous drop in the Hong Kong Index?

NARIMAN BEHRAVESH, Standard & Poor's DRI: Well, Hong Kong is the latest victim of a deflationary wave that's been hitting all of Asia. And basically what's happened is with all the devaluations in the other parts of Asia Hong Kong--the competitiveness of Hong Kong is being brought into question. So there was an attack last week--it really started last week--but then it's continuing this week, and there are some questions about what's going to happen in Hong Kong in terms of Hong Kong's growth, in terms of the property markets and so forth, so this is the manifestation of investor uneasiness about the outlook for Hong Kong.

The causes...

MARGARET WARNER: And, Mary Bush, what do you think caused--what are the other factors that--

MARY BUSH, International Financial Advisor: Margaret, I think that there are several factors that caused this. First of all, Hong Kong was the last of the Asian markets to really be holding on in the face of what started with Thailand several weeks ago. So there is general market jitteriness, I think, about Hong Kong's ability to hold on, and also very importantly about its ability to continue to maintain a fixed exchange rate with the dollar, which they've had since the early 1980's. That's an important factor, and another important factor in relation to that was the fact that last week the Hong Kong monetary authority, the equivalent of a central bank, essentially had to boost interest rates quite substantially in order to fight off selling of the Hong Kong dollar. And that made investors even more nervous. It made them nervous about the property markets as well.

MARGARET WARNER: Mr. Behravesh, explain why it--explain why it's so important to Hong Kong to maintain this fixed exchange rate with the U.S. dollar and why that--add, if you could, to what Mary Bush said about why that has an effect on the markets there.

NARIMAN BEHRAVESH: Well, Hong Kong's staked its credibility in terms of stability, in terms of a financial center in Asia on this fixed exchange rate really since the early 1980's, and I think they're very worried that if they abandon this fixed exchange rate that it will create more instability. The irony is by not abandoning it almost, by raising interest rates, as was said earlier, they're creating just as much instability. And I think that's the major concern. The problem is with all the neighboring countries devaluing this creates a serious challenge and a serious shock, if you will, to Hong Kong's ability to compete.

MARGARET WARNER: I want to get to the other emerging markets in that area, but first let me just ask you, Mary Bush, and how much effect do you think yesterday's precipitous drop on Wall Street had on Asia today? In other words, to what degree was Hong Kong responding to what happened here yesterday?

MARY BUSH: Well, I think it was responding to some extent, and that's really just kind of a general psychology of the markets; that people get very nervous when one market is falling and then another one, you know, kind of takes up and starts falling as well. But there are some other factors that I think we should talk about in terms of what's happening in Hong Kong. We mentioned the property markets, the real estate markets. These are huge markets in Hong Kong. A lot of their economy, you know, is based around property and real estate. There is one factor that I think has not--has been little noticed actually, and that is that the government--you know--which still owns some--a fair amount of land--has announced that it plans to sell more land for development. And when you put more supply on the market, then it's going to threaten, you know, the values of real estate that's already in private hands.

MARGARET WARNER: So are you saying in other words that you don't think--in fact, let's say the U.S. market went up today--do you think that's going to have an effect on the Hong Kong market tomorrow, or are you saying that the problems are really much more endemic over there?

MARY BUSH: Well, I think that problems really relate more to what's happening in Asia. I think that's true. I think it's really--as we talked about--the interest rates--it's the selling of the land. Hong Kong is rich in reserves; they've got about $70 billion in reserves. One of the questions is how long will they be able to fight to hold onto the value of the currency.

MARGARET WARNER: All right, Mr. Behravesh, how serious are the underlying problems in the rest of Asia that you said have so affected the Hong Kong Market?

NARIMAN BEHRAVESH: I think they're very serious. I mentioned the fact that this was sort of the latest episode in a deflationary wage that's occurred. You've got huge amounts of--

MARGARET WARNER: Explain what that means exactly, would you.

Deflation Explained.

NARIMAN BEHRAVESH: Sure. You've got huge amounts of excess capacity in the region largely thanks to the very high levels of investments that have occurred in that region, which means that you've got industries like autos in the region with only a capacity utilization rate of 60 percent. How do you deal with this? How do you sell all that capacity? How do you use up that capacity? Well, you can cut prices, or you can devalue a currency.

And we saw some of that occur both in Japan earlier in the 1990's and Japan, and that squeezed the other Asian countries, who then sort of go caught up in this wave of competitive devaluations. They've started to cut their--let their currencies float. They have, indeed, depreciated significantly. Some of them in the case of Indonesia dropped 50 percent. And so this is continuing. And that's what's really hitting Hong Kong.

But beyond that you've got serious problems in the banking sectors in these countries. Earlier it was mentioned, the property overvaluation, so you have the equities markets' bubble burst; you've got the property markets' bubble burst; you've got serious problems in the banking sector. It's almost reminiscent--this is just in Asia, of course--almost reminiscent of some of the problems he had in the Great Depression in the United States. So I would say it's fairly scary.

MARGARET WARNER: And what do you think it would take for these economies--and I know they're all a little different--but to sort of get back on track, and do you see the governments over there doing what needs to be done?

NARIMAN BEHRAVESH: Well, that's the concern, is that so far there's been a lot of foot-dragging on the part of the governments, too much temptation to blame speculators, and not enough in terms of really addressing some of the fundamental problems. And that's--that too is a concern that there's a lot of sort of shuffling going on and no serious addressing of the fundamental problems. The reality is we know how to deal with these crises. Mexico did what it had to do and bounced right back, but the concern here is that the Asian markets aren't doing it.

MARGARET WARNER: Do you agree with that?

MARY BUSH: Well, yes, to some extent I do agree. One of the things that we have also seen is that Thailand, for instance, has arrived at the door of the International Monetary Fund. And I think that will lead to exactly what your other guest is talking about, and that is putting the right economic policies in place in Thailand. One of the main problems was their banking and financial system, and that's where they're going to have to put a lot of attention in terms of the types of loans that those systems are making, that those banks and other institutions are making; are they good loans; what are they really based on; and the kind of regulation and accounting, you know, that's very open and that people really understand. Those are some of the things that need to be done, and I think they are beginning but they've got a long way to go.

MARGARET WARNER: To restore the confidence of international investors.

MARY BUSH: Absolutely.

MARGARET WARNER: Well, Mr. Behravesh, one, do you share Ms. Bush's confidence that the IMF can kind of come in and lay down some ground rules, and also, why do you think the Asian governments have been reluctant to do what say the Mexican government did?

The role of the Thai government.

NARIMAN BEHRAVESH: I guess I'm not as confident as Ms. Bush in the sense that so far the Thai government really hasn't done very much.

MARGARET WARNER: And why is that?

NARIMAN BEHRAVESH: Well, I think the government is a very weak government. It's a coalition government. Last week there were riots in the streets. I think they're very reluctant to do anything drastic. I think the reason they haven't moved as aggressively as the Latin American countries did in part is because they're used to crises. The Latin countries have had a long series of crisis. They know how to deal with them. This is something relatively new for the Asians. So I think that's part of it. It's just not being used to it.

MARGARET WARNER: And before we go, Mary Bush, what effect now do all these problems have on the other established, more established economies in Asia, say Japan for example, how exposed is Japan?

MARY BUSH: Japan is very exposed. It's very exposed to Asian economies in terms of their banks and lending. It's very exposed in trade. It could have a big effect on Japan because Japanese banks are already in trouble. They already have their own problems caused by, you know, their big lending and real estate and other industries that are having difficulties, so this presents another problem for them. China I would also say we have to look out for because there are, you know, the rich hip stocks which are traded now on the Hang Seng/Hong Kong Index. People are going to be looking for China to really live up to their commitments in terms of privatization and coming forward with that and there's going to be more pressure for that, I think.

MARGARET WARNER: And Mr. Behravesh, briefly, your view on the implications of this for China.

NARIMAN BEHRAVESH: Well, in terms of China I think one thing that could happen is that there could be competitive pressures for China as well in the sense that China already devalued once in 1994. It devalued its currency by 35 percent. But these pressures from the other parts of Asia could mean another devaluation in China, and as was mentioned earlier, there are some serious problems in the banking sector in China. By some definition China's banking system is insolvent right now. Its bad debts are about 35 percent of GDP, which is huge, about three times as bad as the Japanese banking crisis. So there are some serious problems in China that could be exacerbated by what's going on in the rest of Asia.

MARGARET WARNER: All right. Well, Mr. Behravesh, Ms. Bush, thanks very much.

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