Malaysian Stocks Plunge As Fund Plan Is Unveiled

Southeast Asia's financial crisis deepened yesterday as investors reacted with shock to an extraordinary plan by Malaysian Prime Minister Mahathir Mohamad, who vowed to combat "racist" foreign speculators with a $20 billion public fund to prop up the nation's sagging stock market.

The nation's stocks and currency plunged after Mahathir's announcement of the fund, which would equal more than two-fifths of Malaysia's total economic output.

The nation's main stock index lost as much as 10 percent of its value Thursday before closing down 2.6 percent, while its currency, the ringgit, fell to a 26-year low. The currencies of other Southeast Asian countries, which have been buffeted since July by a wave of selling, also fell anew.

The 71-year-old Mahathir, who is famous in Asia for his broadsides against Westerners, announced the fund in a virtual declaration of war against foreign financiers.

"I say openly, these people are racists," Mahathir was quoted as saying in press reports from Kuala Lumpur. "They are not happy to see us prosper. They say we grow too fast; they plan to make us poor."

The hostility embodied in Mahathir's rhetoric and policies raised alarm among some international investors and analysts, who warned that the Malaysian premier's attempt to control the market might succeed only in further driving off the foreign capital that has helped fuel his nation's spectacular economic growth over the past two decades.

And if Malaysia's troubles worsen, experts added, that could further drag down the economies of its Southeast Asian neighbors, just as Thailand's currency crisis this summer exerted a "contagion effect" on nearby countries and other emerging markets.

Analysts took some comfort from the fact that Indonesia announced more conventional measures on Wednesday to restore financial confidence.

Mahathir's moves are particularly "amazing" because Malaysia was "well positioned to weather the storm," said Greg Fager, head of the Asia Department at the Institute of International Finance, a Washington-based organization that represents more than 200 banks and brokerage firms that invest in emerging markets.

"The economic fundamentals in Malaysia are fairly solid," Fager said. "But now, investors are thinking, maybe this isn't so well managed a place. . . . It looks like [the Malaysians] are snatching defeat from the jaws of victory."

The announcement of the stock-buying fund is the latest and most dramatic in a series of moves by Mahathir against foreign investors during the recent currency turmoil, which has included a drop of about one-third in Malaysian stocks and about one-fifth in the value of the ringgit against the U.S. dollar since July.

In July he blasted billionaire American trader George Soros as the chief villain behind Southeast Asia's financial woes because of a bet the influential Soros made against the Thai currency. And last month Mahathir's government changed trading rules to prevent investors from betting on lower Malaysian stock prices. The premier also exhorted Malaysian citizens and local pension funds to buy shares.

The government lifted the trading restrictions yesterday, a move applauded by economists, who said the authorities apparently had concluded the restrictions were only scaring off investors.

The stock-buying fund elicited severe criticism from a number of investors and experts who declined to speak for the record because of fears of retaliation. "We still have to travel to Malaysia," said one.

The U.S. Treasury declined comment, and officials of the International Monetary Fund weren't available for comment yesterday, a spokesman said.

Under the plan, the national pension fund would contribute much of the money for the stock-buying fund, and some money also would be raised from the sale of bonds by a state investment agency. Malaysian citizens who sold shares to the fund would be paid a premium, while foreigners would receive the market price. Mahathir didn't disclose what the premium for Malaysians would be or how it would work.

One Asia expert, Kok Wah Chee of the rating firm Standard and Poor's, said the stock-buying fund ought to work, because "Mahathir has been so highly regarded and respected in the country," and investors would be cheered by his determination to raise share prices.

But many others said the plan more likely would hurt market sentiment than boost it.

"It might inspire some confidence domestically, but I think it would deter foreign investors in the long term," said Paul Matthews, chief investment officer at Matthews International Funds, a San Francisco firm that invests mainly in Asia.