World markets set for plunge as Honk Kong crisis worsens

Renewed turmoil is predicted for the world's stock markets this week, as Hong Kong braces itself for what could be the worst bout of share turbulence since the start of the Asian economic crisis. But the government in Hong Kong yesterday ruled out intervention to save one of the region's largest investment banks.

Stephen Vines in Hong Kong, David Usborne in New York and Chris Godsmark in London report.

Sir Donald Tsang, Hong Kong's Financial Secretary, yesterday emphatically rejected calls to intervene to save Peregrine Investment Holdings, the banking and stockbroking group, which is on the verge of collapse after a pounds 120m bail-out by Zurich, the Swiss financial giant, fell through. Peregrine is still hunting for new investors but is expected to become the first major Hong Kong casualty from the Asian slump.

Seeking to reassure the markets, Sir Donald said he had examined bailing out Peregrine on Friday and concluded that its collapse would not cause "systemic problems".

He said that although some 100 banks are owed money by Peregrine, the sums were relatively small in comparison to their assets. "As I see it, the Hong Kong public is well covered," he concluded.

He also made clear the authorities would not wade in to support Hong Kong's equity markets in the event of a crash this week. "There is no case in my book for intervening in equity markets, even if you believe they are oversold," said Sir Donald.

Most traders are expecting that the stock market will crash when it opens this morning. Hong Kong stocks traded in London fell sharply after trading closed in the territory on Friday, with shares in HSBC, the banking giant, dropping almost 4 per cent. Over the weekend one of Hong Kong's most influential bankers, David Li, predicted that last week's interest rate rise would be topped by another in the near future.

Although unwilling to intervene in equity markets, Sir Donald was adamant that he would do whatever was needed to defend the exchange rate peg which ties the Hong Kong dollar to the US dollar. But he made clear that the price paid to maintain the peg would be painfully high interest rates. "I said on my appointment that during my term I would not change the link. Once you loosen it, it is gone for ever, like virginity."

Meanwhile in New York, concern is growing over the possible ripple effect of the Asian crisis on US companies' profits. US officials, led by Lawrence Summers, Deputy Treasury Secretary, have begun a tour of Asia's stricken economies, starting with Singapore, in an attempt to promote confidence.

The Hong Kong crisis hit US shares on Friday, with the Dow Jones index down 222.2 points, to 7580.4, in exceptionally busy trading. It was the Dow's worst day since its 554-point fall on 27 October last year. In London the FTSE 100 index dropped 98.8 points on Friday, to 5138.3.

Richard McCabe, chief market analyst at Merrill Lynch, said: "I would give the market a few days to try and pull itself up by its boot straps. But if we don't get something going in the next week or so, I would say it's one more sign that it could be a rough year."

At Morgan Stanley Dean Witter, however, US equity strategist Peter Canelo warned against an "orgy of pessimism" about corporate earnings because of Asia. "After Wall Street gets over its emotional reaction and the earnings reports are out, we may find some positive surprises, especially for companies that have no Asian exposures".