Asian financial crisis

The Asian financial crisis was a financial crisis that started in July 1997 in Thailand, and affected currencies, stock markets, and other asset prices of several Asian countries, many part of the East Asian Tigers. It is also commonly referred to as the Asian currency crisis or locally, although inaccurately, as the IMF crisis.

Hong Kong

In October 1997, the Hong Kong dollar, which was pegged at 7.8 to the US dollar, came under speculative pressure since Hong Kong's inflation rate was significantly higher than that of the US for years. Monetary authorities spent more than US$1 billion to defend the local currency. Since Hong Kong has more than US$80 billion of foreign reserves, which is equivalent to 700% of M1 money supply and 45% of M3 money supply of Hong Kong, despite the speculative attacks, Hong Kong managed to keep the currency pegged to the US dollar. Stock markets become more and more volatile, between, 20 October and 23 October, Hang Seng Index dipped by 23%. Hong Kong Monetary Authority promised to protect the currency. On 15 August 1998, Hong Kong raised rates overnight from 8 percent to 23 percent, and at one point, to 500%.

Related Topics:
Hong Kong dollar - Hong Kong - M1 - Currency - 20 October - 23 October - Hang Seng Index - Hong Kong Monetary Authority - 15 August - 1998

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While the Monetary Authority recognized that the speculative forces were taking advantage of the unique currency board system, in which the overnight rates would automatically increase proportionally when the currency is sold in the market heavily, which would in turn increase the downward pressure of the stock market and thus allowing the speculators to earn a large profit by short selling shares, the Monetary Authority started buying component shares of the Heng Seng Index in mid-August. The Monetary Authority and Donald Tsang, then Financial Secretary, declared war with speculators openly. The Government ended up buying approximately HK$120 billion (about US$15 billion) of shares of various companies, and becoming the largest shareholder of some of the companies (e.g. the government owned 10% of HSBC) at the end of August when hostilities ended with the closing of the August contract of Heng Seng Index Futures. The Government started to divest itself from the position in 2001 and made a profit of about HK$30 billion (about US$4 billion) in the process.

Related Topics:
Short selling - Donald Tsang - HSBC

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Speculative actions against the Hong Kong Dollar and the stock market did not continue into September largely due to extraordinary reaction to speculators by the Malaysian authorities and the onset of the collapse of Russian bond and currency market, which caused massive loss to the speculators.

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The currency peg between the Hong Kong Dollar and the US Dollar at 7.8:1 continued to exist undeterred.

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