Update | Hong Kong Monetary Authority vows short sellers will not find it easy to mount assault on Hong Kong dollar
System of reaping profit through co-ordinated shorting of shares and local currency is no longer viable, HKMA says
A more robust system for local banks to obtain liquidity and an enlarged monetary base make it near impossible for currency speculators to mount a successful attack on the Hong Kong currency, according to the Hong Kong Monetary Authority, which said there’s few parallels with conditions today and those in 1997 to 1998 which saw authorities launch a shock and awe defence of the financial system at the height of the Asian financial crisis.
Howard Lee, the HKMA’s executive director responsible for monetary management, said the changed circumstances compared to almost 20 years ago when the crisis happened means it is more difficult for speculators to short-sell the Hong Kong dollar to push up interest rates and cause wider financial markets turbulence. To do so would require speculators to muster hundreds of billions of Hong Kong dollars.
“It is now very difficult for “double play” to work because the Hong Kong dollar monetary base is now much bigger than that in 1997-98,” he said in a statement posted on the authority’s web site on Wednesday.
Double play refers to the strategy used by speculators in the Asian crisis of shorting stocks and Hang Seng Index futures, followed by short-selling of Hong Kong dollar to push up interest rates, so as to create panic in the wider financial markets to reap huge profits on stocks and index futures and currency bets.
Lee said unlike in 1998 when the Hang Seng Index comprised primarily interest rates sensitive property and bank plays, it has a much broader industry representation and is less sensitive to interest rate movements.
Hong Kong stocks are also much cheaper based on price-to-earnings and price-to-book value multiples compared to 1997, leaving less room for speculative attacks to succeed.