Hong Kong drops as crisis grows

ONLY a few weeks after emerging from a crisis inflicted by the killer Sars virus,

Today the benchmark Hang Seng index fell 110.5 points to 10096.7 as investors tried to fathom the implications of the abrupt resignation of two senior policymakers, including Financial Secretary Antony Leung.

Leung quit hours after Security Secretary Regina Ip stepped down yesterday. Both are unpopular: Ip has championed a controversial new security law, while Leung was embroiled in a personal scandal on tax payments for a new car.

The security law - now shelved - has been the target of mass protests in recent weeks, and the twin resignations cast considerable doubt on the ability of chief executive Tung Chee-hwa to remain at the head of the territory's government.

Brokers and economists say while today's share-price falls were muted, the shock waves rocking the establishment of Asia's premier financial centre will make solving Hong Kong's serious economic problems even harder.

The administration faces a gaping budget deficit, record unemployment - as new figures today confirmed - low growth and a perception that it has lost its touch.

Even before the officials quit, one investment bank was warning clients to beware of the undercurrents. 'The prevailing political crisis has further undermined the government's credibility,' it said. 'The government will remain in a quandary about whether to address fiscal imbalances or boost the economy.'

Today's falls may have been small and fuelled in part by unrelated causes - such as Wall Street's backward step yesterday. But the potential turbulence should the crisis deepen, is considerable.

Among today's losers were ports-to-telecoms conglomerate Hutchison Whampoa, down 50 cents or 1% at HK$52, while developer Cheung Kong was off 25 cents or 0.5% at HK$50.50. Pacific Century Cyberworks was suspended at HK$4.85 after a share placing at HK$4.40 to raise $403m (£252m) to cut its hefty debts.

In Japan, stocks slipped sharply, undercut both by a feeling that the current rally is overdone, and with traders' eyes on softer US stocks. The Nikkei 225 dropped 1.9% in mid-afternoon trade, before closing at 9498.86, down 237.11. Tech companies, which enjoyed a heady run-up in recent sessions, were targeted by the heaviest profit-taking.

Chip-testing equipment maker Advantest shed 460 yen or 6.9% to 6,240, while chip-equipment maker Tokyo Electron was pummelled 560 yen or 7.1%, down to 7,310.

Australia's banks came in for a round of profit-taking, pulling the market lower. ANZ led the drop, in part because it has exposure to collapsed US energy company Mirant. ANZ fell 19 cents or 1% to A$17.83, and the All Ordinaries backtracked 0.5% before rallying to close 12.8 points higher at 3088.

Recent Indonesian debutante Bank Mandiri was level at 825 rupiah after news that Morgan Stanley Capital International will soon add it to a widely-followed regional index. The Jakarta Composite index was little changed, down 0.17 points at 524.09.