The Asian economic crisis has finally claimed a significant victim in Hong Kong, with the collapse of the well-known securities and investment firm, Peregrine Investment Holdings Ltd. Market reaction drove down the Hang Seng share index to one of its lowest points in recent memory - most notably the value of the Chinese portfolio holdings - and has led to a dramatic increase in interest rates. The crucial question of whether the Hong Kong currency's peg against the US dollar can hold is also thrown into prominence by these events. Were it to be broken and were China forced to devalue, the worldwide consequences of the regional deflationary crisis would be vividly brought home. The Chinese government and the Hong Kong administration have certainly set their faces very firmly against any change in this established rate. Some 50 per cent of Hong Kong's economy depends on China, a proportion that has been increasing sharply. China's own economy is increasingly affected by the region's turmoil, whether through trade, investment or the exposure of its banking system to the heavy indebtedness of its state industries. Perforce, it has to embark on extensive rationalisation measures, including privatisation and job-shedding, even though it is not beholden to the International Monetary Fund and the disciplines it is imposing on Indonesia, South Korea, Thailand and Malaysia. Hong Kong's chief executive, Mr Tung Chee-hwa, yesterday urged its people to act calmly and with cool heads. It is good advice, but uttered with little passion, conviction or authority, all of which may be necessary to rally sentiment in the difficult days to come. But Chinese leaders can take heart from the increasingly critical voices raised against the IMF's policies in the other Asian economies affected by the economic blizzard. Basically, they amount to the proposition that inappropriately deflationary policies have been imposed on economies more in need of restructuring and a safety net against collapse than of severe cutbacks. If regional deflation is to be avoided, it will be necessary for alternative policies to be introduced, possibly at the initiative of Japan and European Union states rather than of the United States. There are indeed different models of capitalism, other than the US one. The Asian growth model has been based on export-led growth, rapid industrialisation, protected home markets, a relatively egalitarian distribution of incomes, welfare and education and a close interpenetration of states, banks and corporate conglomerates. Behind the response to this crisis there can readily be discerned a US-inspired attempt through the IMF to break up this institutional complex and substitute a more American one in its stead.
But if the price of such a shift is a regional deflation threatening the global economy, it is not worth the candle. There is some evidence that the IMF and the US administration are responding to the criticisms, as they discuss the issues further with Asian governments this week. The crisis certainly brings home the need for much more active discussion of alternative means of handling these issues, and of the genuinely worldwide effects.