Chapter 10: Double play in Hong Kong (1998)
It was a contrived game with clearly destructive goals in mind – drive up interest rates, drive down share prices, make the local population panic and exert enough pressure on our linked exchange rate until it breaks. Donald Tsang (1998, p. 4)1 In the midst of the Asian ﬁnancial panic and the Russian debt crisis of August 1998, extreme downward pressure was exerted simultaneously on the ﬁxed exchange rate of the Hong Kong dollar and the local stock exchange, the Hang Seng. The Hong Kong Monetary Authority (HKMA) established that the pressures were being fuelled by hedge fund transactions conducted jointly on the currency and equity markets and moved to reinforce its support of the exchange rate through massive intervention purchases in the stock market. The decision to intervene, viewed by many as being in breach of orthodox practices and the professional code of conduct of central banks, was severely criticized both within Hong Kong and abroad, but nonetheless proved eﬀective in withstanding market pressures. Indeed, Goodhart and Dai (2003, p. 4) consider the event ‘a rare example of waging a successful battle against speculators’. In 1983 Hong Kong adopted a currency board regime that involved setting a ﬁxed rate of exchange of 7.80 Hong Kong dollars per US dollar. The HKMA maintained currency stability by increasing or restricting domestic liquidity in equal proportion to the inﬂows or outﬂows of capital from and to other countries. International ﬁnancial players were reassured of the regime’s credibility by the...
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