Peg's biggest test led to bonanza
The government's high-risk move to stare down the speculators in the Asian crisis and buy up stocks paid off well
Hong Kong's currency peg faced its greatest challenge 15 years ago when the government spent HK$118 billion to intervene in the stock market during the Asian financial crisis.
But the controversial move paid off, with the government more than doubling its money and investors who bought the Tracker Fund - formed by the portfolio purchased during the intervention - also rewarded.
"Since the peg was established in October 1983, the link had never faced any serious attack," a government official involved in the market intervention recalled. "The [Hong Kong Monetary Authority] only needed to buy or sell the US dollar to push the interest rate up or down to control the flow of funds."
The official said the Asian financial crisis saw the most serious attack on the peg.
The crisis, which started in mid-1997 and lasted 12 months, saw speculators attack many Asian markets including Thailand, South Korea and Indonesia, which allowed their currencies to devalue. Hong Kong became a target in August 1998.
The official said the government learnt that speculators had shorted about US$6.2 billion of Hong Kong dollars in the Hong Kong, New York, Sydney and London markets in the first two weeks of August.