Bears emerge in Hong Kong: Jason Nisse on fears that the booming market is due to fall

THE HONG Kong stock market, which has risen by nearly a quarter in the last month, is heading for its biggest correction since 1987, according to some of the colony's leading analysts.

Peter Everington, the managing director of the Hong Kong arm of Regent Fund Management, has said that the Hang Seng index, which on Friday closed at a record 9,329, up 7 per cent on the week, is set to crash to just 5,000. 'I feel that Hong Kong is in 1987 all over again. The question is whether we are in March, June or October.'

His views are backed up by a number of market watchers who have seen the Hong Kong market storm ahead on the back of the strong Chinese economy, the boom in Far Eastern markets generally and a recommendation from Barton Biggs of Morgan Stanley, the US market guru.

His backing has pushed the market to a point where it is worth the equivalent of 2.4 times the colony's gross national product. In the early 1970s, when the market went through a similar boom-and-bust phase, it reached a peak of just 1.4 times GNP before collapsing to a tenth of its value at its peak.

Jonathan Compton, the top-rated Hong Kong analyst at Credit Lyonnais Laing, said there was an increasing gap between the performance of the market and the underlying fundamentals.

Both Mr Compton and Mr Everington reckon the market could go higher before any crash, thanks to the massive influx of US money that has funded what has been termed a 'feeding frenzy'.

The Hang Seng index future closed at a 200-point premium to the main share market indicating that sentiment is still bullish. Some expect the market to breach the 9,600 level this week.

Mr Everington reckons the Hang Seng index could hit 12,000 before it falls back. He estimates that the latest the crash could occur would be next March, when the Chinese treasury is expected to run out of foreign reserves. The reserves are being depleted at a rate of more than dollars 10bn a year by a massive current account deficit created by China's recent discovery of consumerism. He also points to the need for austerity measures to cut inflation in China, running at 22 per cent.