The battle of the baht
It is political dissidents and rioters that most often fall foul of Indonesia's anti-subversion law. But following heavy selling of the rupiah last month, fund managers could face the ultimate penalty under the same legislation.
After the run on the currency that forced it to float free of its US dollar peg, Indonesian justice minister Oetojo Oesman warned that currency speculators could face subversion charges. "If this practice adversely affects the country's economy, it can be categorized as a subversive offence," he said. He stressed that the anti-subversion law is still valid. The maximum penalty is death.
Indonesia's government is not the only one in the region to react emotionally to "speculators" - the new public enemy. The Thai government has threatened to set the local mafia on George Soros, mastermind of the Tiger and Quantum hedge funds, should he make the mistake of spending even one night in Bangkok. Soros has also been named by Mahathir Mohamad, the prime minister of Malaysia, who accuses him of trying to impoverish already poor countries.
That may be one result of Soros's activities, but it can hardly be his motive. Bankers in Asia argue that hedge funds are rational investors who trade on fundamentals; their sole motive is profit. But Soros is a convenient and well-known target.
This view of Soros is reminiscent of the old Soviet propaganda posters depicting top-hatted Uncle Sam figures with fat cigars and dollar signs in their eyes exploiting the socialist workers of the world using whips, chains and the power of the greenback.
The focus on Soros and other US-based investors appears to be an attempt to divert attention from powerful locals who politicians and central banks dare not attack in public. A number of Chinese billionaires, who have typically built their wealth on commodity trading, are a significant and highly leveraged force in the foreign-exchange market, bankers say, although the volume they control does not yet equal that of the US hedge funds.
"Just look at how many financial institutions here in Hong Kong offer private banking - that says it all," says a foreign banker. Another Hong Kong banker reports that several wealthy customers were asking for credit lines on Friday, August 15, presumably to buy dollars and profit from the market pressure on the Hong Kong dollar. Malaysia and Indonesia are home to a smaller number of billionaire speculators.
An old quip of bankers - "If you buy, you're an investor, if you sell you're a speculator" - is being retold by Asian financiers, who find it an apt way to describe the official view of the currency crisis. "The central banks seem to believe that if you do the natural thing and hedge or go short, you're a speculator," says one banker. "If you're an investor, everyone loves you."
Market participants admit they are worried - most of the bankers and investors who spoke to Euromoney declined to be named.
All this has led bankers to question whether Asian central banks can distinguish between speculation and legitimate investment strategies. Thailand's relative economic weakness, for example, no longer justified the baht's pegged level before it was forced to float. "The market looks for inconsistencies between a policy regime and the fundamentals. In Hong Kong, the dollar peg twinned with the free-floating rate against the yen implies there's something to be tested. Do you call it speculation or market-efficient behaviour?" says the head of a Hong Kong investment house. "Is this a market or a kindergarten?" asks another banker, more bluntly.
Some bankers refuse to use the term "speculator", which has become loaded and politicized. They insist that investors should be judged only according to their knowledge of the market, their professional skill at analyzing trends and the size of their leveraged portfolios.
There were sound economic reasons for the attacks. But the central banks did not respond entirely rationally. "They're in a difficult position," says Chris Pavlou, Midland Bank treasurer in Tokyo and Asia-Pacific delegate on the executive committee of the ACI, the forex traders' association. "If they defend something that is not sustainable they're going to throw good money after bad. An adjustment was needed, and they might have devalued 5% to 10%. But because of their insecurity, the central bankers sat there hoping for the best. And the market did it [devalued] for them."
Arguably the pressure on Asian currencies - with the exception of the Thai baht - was not generated by speculative attacks by foreign investors at all. They were one influence in a complex world, say some bankers, who are convinced the myth of conspiratorial speculators was created and nurtured by central bankers to win public support for the local currency. The central banks will not comment.
After all, it was quite clear that the real danger to the Hong Kong dollar was not from speculators but from a possible loss of public confidence in the local currency and a capital flight into US dollars. A triumphant announcement by the Hong Kong Monetary Authority (HKMA) on Monday, August 18, that it had "defeated the speculators" was disregarded by bankers; one shrugged and described the statement as "words for public consumption".
The alternative view of a widespread loss of confidence suggests that the currency turmoil was triggered not by speculators but by local companies - and by banks.
Until the currency crisis this summer, domestic corporations in Thailand, Malaysia, Indonesia and other Asian countries routinely failed to hedge their forex exposures because they believed the US dollar pegs were inviolate. When the local currencies were cut loose from those pegs, companies grew frantic and started buying US dollars and other major currencies as quickly as possible. Local currencies were sold in substantial volumes.
The central banks realized that banks were not only executing trades for the so-called speculators but also giving them credit lines. Rather than trying to mitigate the damage to their economies, central banks immediately devoted their attention to finding out which banks had financed speculators - and trying to punish them.