During my nearly three decade career with the HKMA, I have had the unenviable experience of very close encounters with two major financial crises, nam

Asian Financial Crisis: The Battle to Defend Hong Kong’s Financial Stability

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2023-03-17 04:30:07

During my nearly three decade career with the HKMA, I have had the unenviable experience of very close encounters with two major financial crises, namely the Asian Financial Crisis (AFC) which started in 1997 and the Global Financial Crisis of 2008.  In particular, during the AFC that rampaged across the region, there were attacks on Hong Kong, with speculators using a “double play” strategy to manipulate both the currency and stock markets, with the aim of breaking Hong Kong’s Linked Exchange Rate System (LERS) and profiteering from the stock market.  I was tasked to take command of a stock market operation.  While we were “fighting” the battle on the frontline, many critics at that time did not understand the reasons for our operation, which they believed was a betrayal of the fundamental principle of the free market.  So I would like to share with you my personal experience of this special episode in Hong Kong’s history.

Financial crises do not occur out of thin air.  Prior to the outbreak of the AFC, many economies in the region were already showing signs of vulnerabilities, including currency over-valuation, overheating of the economy, and excessive borrowing.  In particular, there were serious imbalances in the external sector, such as current account deficits, and high levels of external debt, as well as maturity and currency mismatch within the banking system.  Many international banks, especially those from Japan, were engaged in aggressive lending in the 1990s, leading to easy credit to the emerging economies in Asia.  All of this did not go unnoticed by speculators, including hedge funds, lurking in the wings.  They just needed the right moment to start preying on the yen and other Asian currencies.  The conditions were ripe for a perfect storm.

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