Malaysian sell-off sparks further round of turmoil in the Far East

East Asian stock markets trembled yesterday as sell orders poured into dealing rooms, sending the markets into a tailspin. One market after another succumbed to a bout of nerves. "The entire region has been sold off," said James Osborn, director of sales at ING Barings Securities in Hong Kong.

Brokers struggled to pinpoint the catalyst for the turmoil, although most believed that the carnage started in Malaysia, where the KLSE Composite Index recorded its biggest fall of the year - plunging by more than 10 per cent at one stage before closing some 4 per cent down.

Meanwhile, the local currency plunged to a new low against the US dollar as fears over the burgeoning current account deficit undermined confidence.

The Malaysian sell-off was triggered by the authority's rather heavy- handed attempt to curb short selling. Traders were alarmed by a sudden change in the rules which demanded cash up front for share purchases and the need to deliver scrip before selling.

Had market conditions been more stable, the response to a sudden change in trading rules might have been less extreme but Malaysia's stock and currency markets have been in a bearish mood and required only the smallest excuse to plunge into gloom.

As news of the Malaysian sell-off flashed across the screens in Asian dealing rooms, traders began to fear that the whole region would follow suit. It turned out to be a self-fulfiling prophecy, underpinned by genuine reasons for disquiet.

These were most visible in the Philippines, where the release of poor economic growth figures and worries about the local currency prompted investors to knock more than 9 per cent off the value of shares in Manila, the biggest single-day fall in 10 years.

In Indonesia, where the government had been congratulating itself on fighting off speculation against the local currency, the price of the fight was being calculated, leading to fears that the increase in interest rates would take a heavy toll on banking and finance companies. Heavy share selling in this sector caused the market to slump by almost 5 per cent.

And in Hong Kong, which had been buoyed the previous day by a successful land auction, the stock market had its second busiest day, leaving the blue chip Hang Seng Index more than 4 per cent down. The 658-point fall in the index was the fifth biggest on record, although in percentage terms it was overshadowed by the big plunges of the 1970s and 1980s.

Ironically Hong Kong seemed to be the victim of its success as a highly liquid market. Fund managers turned to their stock holdings in the territory to provide cash for redeeming positions in other markets.

There was also uncertainty over government measures to curb property prices. This uncertainty has cast a long shadow over the market, helping to fuel the 11 per cent decline in share prices recorded over the past three weeks.

Meanwhile the Singapore market fell 3.6 per cent, taking it to a four- year low. Thailand topped 10 days of losses with yet another fall, dragging the market down by 2.3 per cent as the local currency fell to yet another low against the US dollar.

At the beginning of the week Asian governments were trying to talk up the markets by boasting that they had seen off the big institutional investors who were allegedly speculating against their currencies. However investors failed to be impressed, leaving market makers to reassess their views of how far Asian markets might fall.

Even the relative strength of Wall Street has done little to improve sentiment. US-based finance house Goldman Sachs added to the depressed mood yesterday when it issued new forecasts, downgrading growth estimates for key east Asian economies.

Bargains are beginning to emerge in these markets, but investors are wondering whether it might be better to wait for a real fire sale.