• Mon
  • Nov 24, 2014
  • Updated: 9:53am
Jake's View
PUBLISHED : Thursday, 31 July, 2014, 1:01am
UPDATED : Thursday, 31 July, 2014, 1:01am

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

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.

jake.vanderkamp@scmp.com

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This article is now closed to comments

johnyuan
I am no financial person and know very little about how the world’s financial structure works. I learn little by little by reading up columns such as JvdK has provided today.
.
I suspect our chief executive of Hong Kong Monetary Authority Norman Chan is really no better than me.
.
Yet he has the authority holding up our money from spending. Just because he can do so by virtue of the existence of the Authority which he can even get pay for it and a lot of it too.
.
He and I both can’t be qualified for the job as a chief executive of Hong Kong Monetary Authority by the sheer fact that I am too old and he is just too green. I wonder who does he know to land on this job?
artdig18
It is such a shame that both the Financial Secretary and the CE of HKMA think that they are safeguarding the future of Hong Kong people and want to keep adding to their mountains of cash. They concentrate on what future disasters that may or may not occur and forget the problems of current people in Hong Kong that helped built those mountains.
asiaseen
He's was Donald's big pal.
pslhk
This turgid gibberish is uncharacteristically JvdK
-
Who’re those simplistically labeled “yahoos”
that required 120 billion 1998HKD to fend off?
-
How much did they lose before they backed off?
Were those “yahoos” ever held accountable for the losses?
-
If JvdK looked at reality and not into a looking glass
he’d have spoken against his non sequitur
“if vultures think you are running a honest show
they would look where you may be vulnerable
and try to rig your market for killings”
That was exactly what happened in 1998
-
The real question is why, compared with say Singapore,
is HK so concerned about “insurance against financial crisis”?
-
“honest show” and “vanity with unsupportable interventions”
are irrelevant whether in time of financial peace or war
We’ve watched how the Fed, the old lady and USK treasuries waltz
with AIG, a non-bank, Citi, RBS, Barclays, HSBC, …
-
HK’s main fiancial problem is professional deficit
A “world class” financial center without a “world class” local bank
neither, commercial, retail, private nor investment
-
Some may laugh at Anthony L’s lack of investment cells
but he is Einstein compared with Vincent C
who should be hired to coach HKP
how to open the mouth and disperse the crowd
-
HKMA personnels are at best bureaucrats
who on that level compare rather poorly
with their Singaporean counterparts
mh0908
We need physical gold, not fiat money in our reserves!
danfam
Thanks Jake-I was around in 1998 and it was clear then that the market will always be in charge-it's always naïve to think you can beat the natural order of things.Think what HKG could do with that money to ease our social problems.
wailunscmp
Great stuff Jake ! these government bureaucrats don't know what they are talking about most of the time. It's the blind leading the blind here. Speculators thrive when they see an under or over priced asset, not when the asset is prperly priced. so sometimes it's better to let the asset depreciate in price according to market movement
prctaxman
Bravo!!
kctony
It's not Norman's fault.
When you sent an AO who has little international finance exposure, he will just sit tight and thanks nothing happens every day.
johnyuan
Aha, twice.
.
One for Norman Chan and one for John Tsang.
 
 
 
 
 

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