This week's chaotic events in Asia lent credence to the theory that the global economy is drifting towards a dangerous slump and that world leaders do not quite know what to do about it.

At the beginning of the week the focus was on the implosion of the Russian economy and how it might affect the United States and Europe - and inevitably Asia. Then on Monday the Hong Kong stock exchange spiralled downward as the government halted an unprecedented two-week share-buying spree.

On Tuesday it seemed that everyone's worst fears were about to be realised and that second phases in Asia's economic crisis were about to get under way, with the region plunging into an extended recession. All the Asian markets slid towards the abyss after Wall Street took a spectacular fall, except for Japan which bucked the trend. As the dollar dropped in value the Japanese yen picked up and so too did Tokyo share prices.

Then the focus suddenly changed again, this time to Malaysia where the government effectively threw up its hands and retreated from the world economy, with the announcement that it would freeze currency trading. The move underlined prime minister, Mr Mohamad Mohathir's, "Asian values" contempt for the free market and brought about a political crisis in his own ranks which resulted in the dismissal the next day of deputy prime minister, Anwar Ibrahim, author of "The Asian Renaissance" and a less volatile politician.

A strong overnight rebound on Wall Street and Malaysia's pre-emptive strike dominated activity in Asian markets on Wednesday but as the smoke cleared it seemed that no other government was tempted to follow Dr Mahathir into the wilderness. The three most battered economies in Asia - Thailand, Indonesia and South Korea - are under the effective control of the International Monetary Fund, and the IMF is opposed to restrictions on capital flows.

It is worth noting, however, that Taiwan, which has stayed largely aloof from the Asian turmoil, also took measures this week to warn off foreign currency speculators, in particular Mr George Soros who is seen by many Asian leaders as a predator waiting to strike at the first signs of weakness. "The central bank will stringently monitor the foreign exchange market so that such speculators will find no quarter to operate here," said Mr Chou Ah-ting, head of the foreign exchange department in Taiwan's central bank.

Taipei has already erected barriers to speculative attacks on the Taiwan dollar and inflows of funds destined for the stock market are now subject to central bank approval.

But as always the focus soon returned to Japan, the world's second largest economy, whose fate will largely determine that of its struggling neighbours in Asia.

At his Wednesday press conference in Moscow, US President, Bill Clinton, emphasised that the response to recent declines in stock prices should be to restore world economic growth and that in this respect Japan was especially important. "Unless Japan begins to grow again it's going to be difficult for Russia and other countries to do what they need to do," he said. All eyes now are on a meeting this weekend between US Treasury Secretary, Robert Rubin, and Japanese Finance Minister, Kiichi Miyazama, which President Clinton described as "profoundly important".

Japan gained some benefit from the dollar's weak spell in the wake of Wall Street's dismal Monday. Three straight days of increases on Tokyo stock exchange and a rising yen eased frayed nerves among traders, and helped pull up other Asian markets, including Hong Kong. "After several days of weakness, we've watched New York rise and the yen improve," said Mr Yasuo Ueki, manager at Nikko Securities on Wednesday. "This is a very auspicious change of environment."

However, Japan, now deep in recession, still seems chronically unable to undertake the type of structural reform needed to invigorate its economy and revive growth. Japan's longterm market interest rates fell to a global low after new figures showed that the government's stimulus package was not working.

For the seventh consecutive month construction orders - a key to increased government spending - fell in July and retail sales and industrial production followed suit. Housing starts were also down for the 19th month in succession. Japan's markets are also unnerved by fears over the country's banks crisis. Several reform measures before parliament are bogged down in committee.

Reform of Japan's ailing bank system should be the main goal in the country's attempt to lead an Asian recovery, said Mr William McDonough, president of the New York Federal Reserve, keeping up US pressure. "No banking system in my knowledge has ever been rescued if the underlying assets beneath the loans are not cleaned out. That's been the common characteristic of all banking system recoveries."

The Hong Kong government meanwhile took a breather at the start of the week and temporarily halted its buy-up of shares, an unprecedented move which put a $15 billion (£10.5billion) hole in its currency reserves of $96.5 billion over the last two weeks. This foray into the stock market was designed primarily to fight off an attack on the Hong Kong dollar's peg to the US dollar. It left the market in a state of uncertainty, as it was designed to do, with speculators frightened to plunge in, knowing the government was playing cat and mouse with them and could intervene at any time and dictate the trend.

The government was specifically designed to thwart a tactic whereby speculators take "short" positions on the stock market futures index while selling Hong Kong dollars, thus putting pressure on the currency, forcing interest rates up and pushing shares lower, enabling them to realise profits on the futures contract.

However well it worked, this government tampering with the free market has led to questions about credibility and confidence in the former Crown possession which was rated the freest market in the world a year ago. Hong Kong is now reported to have acquired some 10 per cent of HSBC Holdings, the Hong Kong-based international banking group and 11 per cent of Swire Pacific, the British-controlled conglomerate, undermining its independence in setting financial priorities.

As Democratic Party leader, Mr Martin Lee, said, the government is now not just a regulator but a player. The share-buying, organised by Hong Kong's Monetary Authority, has also not scared off all speculators. Some have rolled over their futures positions. But some fund managers took capital out of Hong Kong - which the Authority was trying to prevent - simply because they felt obliged to sell at the artificially high rate brought about by government buying.

Many analysts ask why Hong Kong should be spending precious reserves to maintain the 15-year-old peg. The answer is that Hong Kong could become another Indonesia, according to Mr Antony Leung, a senior banker and a member of the government's advisory cabinet. It would result in capital flight and confusion, according to Hong Kong's chief executive, Tung Chee-hwa.

Unlike Indonesia, however, Hong Kong is not burdened by dollar debts and the territory will not default if the currency is devalued. Also companies could withstand a significant fall in the Hong Kong dollar and in earnings before they would be unable to service their debts. The retail and tourist industries in Hong Kong are crying out for devaluation to revive their turnover, but if this were to happen, China's currency - also pegged to the dollar - would almost certainly be devalued, triggering another round of competitive devaluations in the region as economies struggle to hold on to export markets. The big danger in Hong Kong is panic. Confidence is low and Monday's Wall Street fall had people confessing to being more frightened than before about the future.

Hong Kong's crisis poses a challenge for Beijing, which has much at stake in Hong Kong. There was speculation during the week that China may be ready to use some of its own reserves of $140 billion to shore up the Hong Kong market to protect its main source of the international investment capital it needs to restructure bankrupt state-owned enterprises.

But this, say analysts, would undermine confidence in the "one country, two systems" formula, created to allow Hong Kong to continue its capitalist ways without interference. It would also create internal problems in mainland China, where unemployment is rising and flood damage has strained local resources, to be seen to bail out wealthy Hong Kong. The former British colony, it seems, will have to manage its own way out of the worst economic crisis in living memory.