Black Wednesday overshadows dark debut for China Mobile
A financial journalist's perspective on the events that led up to Hong Kong's stock market crash in October 1997 and the difficult days that followed
Déjà vu is a common experience for followers of financial markets, as the unrelenting boom-bust cycle invariably churns out events similar to those that have passed before. Sometimes, however, circumstances conspire to produce a singular event that still stands out in the mind nearly 20 years later.
Black Wednesday – October 23, 1997 – was a day that Hong Kong financial journalists will not soon forget. The Asian Financial Crisis had finally started to rattle the Hang Seng Index (HSI) earlier in the week, but the events that would earn this day the “black” tag were yet to unfold.
The most notable item on the agenda this trading day was the highly anticipated debut of China Mobile (née China Telecom; 00941.HK), China’s first listed telecom entity. The stock would close its first trading day below its initial public offering (IPO) price, against the backdrop of a 10% plunge in the HSI and the overnight interbank rate shooting up to almost 300%, a level not seen before.
Amid the mayhem, it took me a long time to figure out what I was going to do that day as a financial reporter for the Hong Kong Economic Journal.
I recall within the first hour of China Mobile trading, the HSI – the benchmark of top Hong Kong stocks and the best measurement for local sentiment – fell some 15% to below 10,000, providing the first clear indicator that this was the beginning of a painful year ahead.
All the elements in place for a crash
You always remember your first stock market crash, as strongly as you remember your first love, because of the time (and money) you lost in trying to figure out what happened.
When I look back now, the year 1997 had all the elements in place for a resounding crash.
The property market was clearly overheating after a three-year rally fueled by “sea tortoise” home buyers (the local term for overseas migrants returning to Hong Kong after the late 1980s immigration surge).
In those days, people would line up overnight to buy new flats and then sell their spot in line, or flip their assigned ballot for quick money. The East Point City development at Tseung Kwan O was priced at a dizzying HK$8,000 (US$1025.6) per square foot, five years before its MTR station was due to open.
Meanwhile, local retail investors could not resist the siren call of the red-chip bubble, driven by Chinese enterprises incorporated outside China buying up Hong Kong businesses. From Citic Pacific’s buying into key telecom, utility and aviation assets to China Everbright’s taking minority stakes in many small listed companies, investors drove this early iteration of the China dream to unrealistic and unsustainable valuations.
So China Mobile came to market at a historical peak and was, naturally, strongly oversubscribed. Its landmark dual listing in Hong Kong and the United States represented the first deregulation of a state-owned sector by the Chinese government, to be followed by the oil and banking sectors in the decade to come.
At the close of trade on Black Wednesday, the mighty China Mobile was down 9.7% from its IPO price of HK$11.68. Some investors blamed the company’s relatively inauspicious stock code – 941 – as it lacked lucky numbers such as 3 and 8, which in Chinese sound similar to the respective pronunciations of “live” and “fortune”.
It would seem that China Mobile executives did not request an auspicious stock code from Hong Kong Exchanges and Clearing on their way to market, choosing instead to prove the company’s worth as a formidable player in the telecom space. Indeed, for much of the past 20 years, it has remained the HSI’s biggest stock by market capitalization.
But back in October 1997, when the HSI lost one-third of its value in a single month, China Mobile’s shaky start put it in danger of looking like just another enfeebled behemoth.
Fighting off the big crocodiles
Market watchers may have noted elements for a crash falling into place, but the ultimate trigger was not as easily foreseen.
The fall of regional currencies put huge pressure on the Hong Kong dollar peg to the US dollar. To make it worse, the strong response to the China Mobile listing meant that a significant amount of capital was locked up and could not be repatriated in a timely way.
This set the stage for the sharp, albeit short-lived, hike in the overnight interest rate to 280%, sparking massive volatility in both the currency and the stock market.
Hong Kong missed the first wave of the Asian Financial Crisis, but it now became an ATM for international hedge funds trying to break its linked exchange rate system, in place since 1983. These speculators, led by George Soros, sold off Hong Kong dollars against US dollars, Hong Kong dollar futures and HSI futures in an attempt to force local monetary authorities to re-peg at a higher level.
In the months to come, the government’s financial team – the three musketeers Donald Tsang Yam-kuen, Rafael Hui Si-yan and Joseph Yam Chi-Kwong – used every resource at their disposal to defend the Hong Kong dollar from the speculators (so-called “big crocodiles” in Cantonese). They won, but at a steep price: the stock market had fallen some 70% from its peak and the city’s property prices were down 60%, and would stagnate over the following five years.
From the best to the worst of times
Three months after Black Wednesday, the default of an Indonesian taxi company caused the shutdown of Peregrine Investments, a home-grown brokerage run by Francis Leung and Philip Tose. This marked a sad point in my career because I, like other financial journalists, maintained close contacts with the media-friendly Peregriners.
It was hard to accept that such a young and energetic firm could be blown away overnight. On the eve of its ultimate collapse, I witnessed its dejected staff walking out of New World Tower carrying their personal belongings. I even helped a few acquaintances carry their boxes to the taxi stand!
Those were the days, my friend…
Twenty years on and history continues to find ways to repeat itself. Those of us who missed the opportunity to buy China Mobile at its IPO price may now be kicking ourselves for not investing in another China giant, Tencent Holdings, which has gone from a humble start in 2004 of HK$3.7 (or an adjusted HK$0.74) to HK$280 at the time of writing.
Over the years, many journalists, myself included, have changed jobs due to the deteriorating media industry outlook. This year we have organized a special reunion party for our friends who covered China Mobile back in the day, to celebrate our collective survival and a colorful 20 years in financial journalism. And we also look forward to hearing the latest gossip on the status of our old Peregrine friends.