(Saigon Times Daily ngày 10-2-2003)
47. Hong Kong and The Speculative Double Play
Since 1983, the Hong Kong dollar has been fixed at HK$7.8 per U.S.
dollar. The tercitory's authority has followed a special exchange rate system
named currency board.
Under this regime, the Hong Kong central bank holds U.S. dollar
reserves at least equal to the amount of HK dollars in circulation. Like any
fixed exchange rate system, the currency board has advantages and
drawbacks. But thanks to substantial foreign exchange reserves and healthy
banks, Hong Kong has survived a number of crises and busts, including a
massive speculative attack during the Asian financial crisis of 1997-1998.
During the crisis, speculators used a double play strategy to attack the
HK dollar. After having lavishly borrowed in HK dollars, the speculators
made a run on the currency to push up the demand for U.S. dollars. The
speculators expected that the supply of HK dollars would automatically
shrink, which would cause interest rate to rise, affecting investment and
bringing down stock prices. In anticipation of this effect, the speculators
simultaneously "shorted the stock market", that is they borrowed shares
from stockbrokers and sold them immediately in the market in order to buy
the stocks back later at lower prices.
Thus, they expected to make money even if Hong Kong's Monetary
Authority did not abandon the currency board and the currency attack
failed.
The Monetary Authority used a two-prong defense to bust the double
play. First, it increased its lending interest rates to make the debt service
costs unbearable for the speculators. Second, the agency made massive
purchases of stocks, so their prices went up, instead of down. The strategy
