Effects of the Asian Financial Crisis on Hong Kong

The Asian financial turmoil started off in Thailand immediately after Hong Kong's retrocession to China in July 1997. It quickly swept through to the rest of South East Asia. The contagion then spread to what analysts believed to be healthy countries. By the latter half of 1997, financial troubles in Japan and corporate bankruptcies in South Korea rocked North Asia. In early 1998, the fall-out in Indonesia gave a further shock to South East Asia and the rest of the region. These events have tended to compound each other, resulting in serious regional crises with profound implications for the global financial markets. Hong Kong, as a significant member of the global and regional financial community, could not have been immune. The effects of the financial crisis were similar throughout the affected countries. The most conspicuous features of the turmoil were substantial downward pressure on the stock markets, an upsurge in interest rates, rising inflation and rising unemployment, and, with the exception of Hong Kong, sharply depreciated and highly volatile exchange rates. The major outflow of cash from the region affected the business sectors causing businesses to experience widespread liquidity squeezes as the banking sectors exercised stringency on account of their diminishing deposits, falling value in collateral and worsening quality of loans.

HKMA Intervention into the Stock Market Since the Asian crisis erupted in mid-1997, Hong Kong has experienced a number of speculative attacks aimed at toppling the HK dollar and breaking its fifteen-year old link to the US dollar. The Hong Kong government, in an attempt to defend its currency, forced interest rates beyond normal self-correcting levels and intervened heavily in the stock and futures markets to punish currency speculators. The decision to intervene was made by four people: Hong Kong Financial Secretary Donald Tsang Yam-kuen, Chief Executive of the Hong Kong Monetary Authority (HKMA) Joseph Yam Chi-kwong, Secretary of Financial services Rafael Hui Si-yan, and Chief Executive Tung Chee Hwa. The decision was not made lightly; they knew the economic and political consequences of intervention. But this group also knew that if the incentives for currency speculators weren't removed, Hong Kong would be headed down a vicious spiral of economic collapse. The peg is successfully maintained by a strict and automatic currency board system, backed by more than adequate foreign currency reserves, the third largest in the world. Only Japan and mainland China have more foreign currency reserves than Hong Kong. The Chinese reserves, through commitments of up to US$50 billion, have had a stabilizing effect on Hong Kong. Normally, a currency board is a passive "instrument" that allows none of the manipulation that the HKMA had undertaken over the past 18 months. The tactics used have called into question Hong Kong's traditional dedication to the free market (Reyes, 50) download