How Hong Kong acted in the crisis

When the crisis swept the entire Southeast Asia, Chan and So etc (2002) stated in their book “Crisis and transformation in China’s Hong Kong” about the Hong Kong government original attitude, “The initial reaction of the Hong Kong Special Administration Region (SAR) government was one of indifference and misguided self-confidence.” However there was a reason for government’s optimism, Hong Kong was the one of the ‘Dragons’ in the Asian area and it was also the most successful economic development model in the world. Furthermore, Hong Kong was hold worth over US $80 billion foreign reserves which were the third largest in the world (Lui 2002). Even better, Hong Kong also had a successful experienced on defending currency attack in early 1995.

Nevertheless, this confident didn’t last for long. International speculators’ ambitions for Hong Kong were not only to aim at the Hong Kong dollar profit, but also to gain benefit in the stock market and futures market. Their approach was to accumulate of a large amount of short positions in the futures market firstly, and then buy dollars forward, put forward the Hong Kong dollar. Hong Kong Monetary Authority (HKMA) used the interest rate arbitrage, also known as the automatic adjustment mechanism as a tool to defend currency attack. It means when the Hong Kong dollar came under attack, government would increase interest rate to deal with it. People would start to worry about the interest rates soared to push down the stock and property market, while the speculators could be taking advantage of that, to selling massive futures. As a result, the stock market panic, everyone would sell stock, speculators could close out short position and earn huge profits from it. 

The above graph shows the daily K line in Hang Seng Index from August 1997 to August 1998. It clearly indicated that there was a sharp decrease in October 1997. Like a Curse, ‘Black Monday’ landed in Hong Kong just one day after the 10^th anniversary of the most famous ‘Black Monday’ occurred in 19^th October 1987. On 20^th October, the Hong Kong stock market started to decline. One day after it, the Hang Seng Index fell 765.33 points, and continued the momentum, it fell 1200 points in 22^nd.

In order to deal with the dilemma, Hong Kong Monetary Authority carried out several measures. One was to use a huge amount of foreign reserve to absorb Hong Kong dollar. Second was to raise the interest rate and tighten the money supply. After that, Hong Kong stock stopped falling and started to grow quickly. Chinese government also helped Hong Kong by cutting interest rate. All these factors made Hang Seng Index rebounded rapidly, also made Hong Kong dollar restore stability.

In 2007, Rodney Jones, an asset manager represented George Soros, said in an interview, "Government intervention raised public confidence in the market when it was near total collapse. It prevented a bigger crisis and saved the market." "We used to doubt if the HKSAR government's intervention would be effective or not, as timing and choice of strategies were of crucial importance. From what we see now, the HKSAR government chose the right time to intervene. We made a mistake at the time."

more about this interview just  click here