Jake's View

Hong Kong government's reserves are not big enough to fight 'financial predators'

Head of the HKMA believes the government's reserves can fight off 'financial predators', but in reality it is a case of Norman versus Goliath

PUBLISHED : Thursday, 31 July, 2014, 1:01am
UPDATED : Thursday, 31 July, 2014, 1:01am

The government intervened in the markets in August 1998 to counter the double market play by international financial market predators. The operation involved the Exchange Fund's acquisition of HK$118 billion of Hong Kong equities. In the end, the financial predators were successfully driven off and financial stability restored. An important point to note is that our stock market capitalisation was only HK$2 trillion in August 1998, but has grown 12 times since then to HK$24 trillion.

Norman Chan Tak-Lam,
HK Monetary Authority

And therefore, says Norman, we cannot possibly use that HK$1.6 trillion of net savings we have in the Exchange Fund for anything but insurance against financial crises. Everything has got so much bigger and we need every cent we have.

Note first of all that we have here a major policy shift. It used to be that participants in financial markets bore their own risks. Norman now says it is the HKMA's job to guarantee the prices of a wide array of financial assets through unlimited access to the public purse. How did that happen?

But let's go back to that 1998 stock market gambit orchestrated by the then-financial secretary Donald Tsang Yam-kuen.

We were a year into a general Asian financial crisis at the time, the peg to the US dollar was in occasional question and general confidence was weakened when a certain ship owner's son, mistakenly made chief executive, vowed to trash property prices with a flood of new housing.

Financial predators were not driven off in 1998. There were none, only a few young yahoos

It then occurred to a small clique of young yahoos working for some of the investment banks that there was an easy way to make money.

Start with a quiet short position in the Hang Seng Index futures, then noisily sell a few index sensitive stocks like Hang Seng Bank on the cash market, shake confidence further by starting up another death-of-the-peg rumour and, when the market has fallen, close out the futures position and walk away with your winnings.

These yahoos were mostly bit players but some of them laughingly referred to this gambit in public as "my private ATM machine" and word of it got to Donald's ears.

He reacted in such a white hot rage it's a surprise that the fire department wasn't called out to a five alarm inferno on Lower Albert Road.

"I'll show 'em," he bellowed and orchestrated a big buying campaign of index sensitive stocks to push up the August futures and punish the yahoos.

He has since always been coy about how much he expected to spend but it was generally assumed that he was thinking of no more at the outside than HK$10 billion. In the end it was HK$120 billion.

There was one point on the last day of his big push that his bank credit lines briefly ran out and the index dropped 400 points on the spot. The whole world saw what he was doing and effectively said: "Well, if he wants to play silly fools with the stock market, we'll stand across from him."

Financial predators were not driven off. There were none, only a few young yahoos. It was Donald who was sent packing. He was lucky in that it happened at the worst of the Asian financial crisis and he turned a big profit in the recovery. But he never tried anything of the kind again. He had seen what big money can do and it scared him.

Norman, the Bank for International Settlements estimates that at the end of 2013 the total worldwide value outstanding for the over the counter derivatives markets was US$710 trillion.

That's just the start of what you have arrayed against you if your so-called "financial predators" decide to take you on. It's about 3,500 times what you have in free fiscal reserves.

You haven't a hope of building up a war chest big enough to contain a financial crisis if the investment world thinks you are vulnerable.

Vultures, however, only feed on dead meat and you will only be vulnerable if they think you are rigging Hong Kong's financial markets. You are safe from them if they think you run an honest show and are not indulging your vanity with unsupportable interventions.

Please don't put on a show of flexing your muscles. You haven't any.