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Intervention to Save Hong Kong: The Authorities' Counter-Speculation in Financial Markets

Author

Listed:
  • Goodhart, Charles

    (Sosnow Professor of Banking & Finance, Financial Markets Group, London School of Economics)

  • Dai, Lu

    (Shanghai, China)

Abstract

By August 1998, the Hong Kong economy had become threatened not only by the natural consequences of the Asian crisis (1997/8), but also by waves of speculation, betting that the authorities would be forced to abandon the linked exchange rate (to the US dollar). When facing previous speculative attacks (starting October 1997), the authorities had followed traditional policies of raising interest rates. But, by August 1998, such policies had helped to batter asset markets; property prices and output were falling, and confidence was low. Moreover, the speculators had developed an ingenious 'double-play', simultaneously selling both the foreign exchange market and the Hang Seng equity market short; whether the authorities used an interest rate defence, or abandoned the 'link', the speculators would gain either way. So, the authorities decided on a bold, unexpected and unconventional response to reports of a further attack. They would undertake counter-intervention, again both in the equity and foreign exchange markets. This was the largest, and most successful, counter-speculative intervention ever undertaken. In comparison to the size of Hong Kong's economy, it was massive. On one day -- Friday, 28 August, 1998 -- the authorities bought up around five per cent of the total capitalization of the Hang Seng. Despite the eventual success of the exercise, the authorities have been quite reticent about their actions, revealing only the aggregate amounts of purchases of each stock intervened. This book uses publicly available market data to trace out the authorities' actions on a blow-by-blow basis, primarily in the Hang Seng equity market, but also in the futures and foreign exchange market. The authors set the intervention in its economic context, describe its development, and assess its results. The book provides a fascinating story and insights into what lessons academics and practitioners can learn from the turbulent events of the time.

Suggested Citation

  • Goodhart, Charles & Dai, Lu, 2003. "Intervention to Save Hong Kong: The Authorities' Counter-Speculation in Financial Markets," OUP Catalogue, Oxford University Press, number 9780199261109.
  • Handle: RePEc:oxp:obooks:9780199261109
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    Citations

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    Cited by:

    1. Gonzalez-Hermosillo Gonzalez, B.M., 2008. "Transmission of shocks across global financial markets : The role of contagion and investors' risk appetite," Other publications TiSEM d684f3c7-7ad8-4e93-88cf-a, Tilburg University, School of Economics and Management.
    2. Dungey, Mardi & Fry, Renee & Gonzalez-Hermosillo, Brenda & Martin, Vance L., 2007. "Contagion in global equity markets in 1998: The effects of the Russian and LTCM crises," The North American Journal of Economics and Finance, Elsevier, vol. 18(2), pages 155-174, August.
    3. Toporowski, Jan, 2006. "Open market operations : beyond the new consensus," Research Discussion Papers 14/2006, Bank of Finland.
    4. Mardi Dungey & Charles Goodhart & Demosthenes Tambakis, 2008. "The US treasury market in August 1998: untangling the effects of Hong Kong and Russia with high-frequency data," International Journal of Finance & Economics, John Wiley & Sons, Ltd., vol. 13(1), pages 40-52.
    5. Krainer, Robert E., 2014. "Monetary policy and bank lending in the Euro area: Is there a stock market channel or an interest rate channel?," Journal of International Money and Finance, Elsevier, vol. 49(PB), pages 283-298.
    6. Michael McKenzie & Olan T. Henry, 2007. "The Determinnts of Short Selling in the Hong Kong Equities Market," Department of Economics - Working Papers Series 1001, The University of Melbourne.
    7. Coudert, Virginie & Dubert, Marc, 2005. "Does exchange rate regime explain differences in economic results for Asian countries?," Journal of Asian Economics, Elsevier, vol. 16(5), pages 874-895, October.
    8. Dungey, Mardi & McKenzie, Michael D. & Yalama, Abdullah, 2013. "The cross market effects of short sale restrictions," The North American Journal of Economics and Finance, Elsevier, vol. 26(C), pages 53-71.
    9. Mardi Dungey & Renee Fry & Brenda Gonzales-Hermosillo & Vance L. Martin, 2005. "Shocks And Systemic Influences: Contagion In Global Equity Markets In 1998," CAMA Working Papers 2005-15, Centre for Applied Macroeconomic Analysis, Crawford School of Public Policy, The Australian National University.

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