Fear, tears and laughter in Hong Kong Monetary Authority’s 1997 currency war against hedge funds
Speculators led by George Soros forced city’s de facto central bank to crank interbank rate up to 280 per cent
Many Hong Kong bankers, stockbrokers and currency traders still recall vividly that fateful day in October 1997 when the Hong Kong Monetary Authority (HKMA) had to squeeze the city’s interbank interest rate to a record to drive out currency speculators led by hedge fund manager George Soros from the financial system.
As Asian currencies started plunging one after another, starting with the Thai baht in July 1997, the attention soon turned to Hong Kong, the financial hub of Asia, barely months after sovereignty had been handed by the British colonial government back to China.
The Hong Kong dollar would plunge from 7.7355 per US dollar to 7.7500 in a week, weakening at an unprecedented pace. In defence, the HKMA drove up the city’s cost of money, the Hong Kong Interbank Offered Rate (Hibor) to 280 per cent to drain money from the financial system, depriving short-sellers of the munitions to attack the Hong Kong dollar.
“It was complete panic on the day in the trading room, as we had never seen the interest rate shoot up so much in a single day,” said KGI Asia’s director Ben Kwong Man-bun, a stockbroker. “Initially, we thought the machine was broken and was sending the wrong number.”
The record Hibor forced stockbrokers to dump their holdings, driving the benchmark Hang Seng Stock Index down by 29 per cent during the month.