Calm has yet to settle on the world's financial markets after several days of turmoil. It has been, by any standards, a remarkable week reminiscent of Black Monday a decade ago. On Thursday the value of shares on the Hong Kong stock exchange fell by over ten per cent. On the same day, the London stockmarket - on which some stocks are exposed to the Hong Kong economy - suffered a major slide as the after-effect of the Hong Kong crash undermined market confidence. Share prices also plunged across other European markets and on Wall Street. Conditions were somewhat calmer yesterday, but a late fall on Wall Street yesterday will mean a nervous weekend for investors, waiting to see what next week holds.
The irony is that the speculative assault on the Hong Kong dollar, the last Asian currency to be firmly pegged to the US dollar, was not unexpected. The speculators clearly believe that it is ripe for devaluation. But the Hong Kong authorities, with some £85 billion in foreign exchange reserves, are determined to defend it.
It was also to be expected that the Hong Kong market would not be immune to the financial crisis which has engulfed several East Asian economies. Since July, markets in the supposed "tiger economies" in Thailand, Malaysia, Indonesia and the Phillipines have slumped dramatically. Indeed, the competitive devaluations of other currencies in the region have put fresh pressure on the Hong Kong dollar.
For the Hong Kong authorities, the stakes could hardly be bigger. The market turbulence represents the most serious test to date for the new Hong Kong government. There is no small irony in the Chinese authorities moving to defend capitalism in such a robust way. But there is no alternative; the Hong Kong dollar and its peg to the US dollar is a powerful, reassuring symbol for international investors. A break in the link would undermine international confidence in Hong Kong's future. And it could raise fundamental questions about the ability of the Chinese to run the territory effectively. The question now is whether the events of recent days are confined to the East Asia regions or whether they have longer-term implications for the global economy. After years of spectacular growth, there is understandable concern that share prices in the major Western markets are overvalued and that some kind of correction may be imminent. Last night's fall in US shares was largely based on fears that slowing growth in Asia could hit exports from the US technology sector.
There is little objective evidence to support fears of another share price crash on Western markets on the scale of 1987. Buttressed by low interest rates, both the American and the European economies are in the throes of a strong recovery - and there are few signs of inflationary pressures.
However, many international share markets have risen sharply and some correction in their value could be in prospect. And it must always be remembered that the stock markets often follow a logic of their own without reference to objective economic evidence. This week's market turbulence will serve as a salutary reminder that nothing should be taken for granted on the floor of the world's stock exchanges.