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.
At the same time, they short-sold a large number of Hang Seng Index futures, which resulted in the gross open positions on the futures market standing at more than 100,000 contracts, up from the normal level of about 70,000.
The government believed the speculators were trying a double play, betting the short position on the Hong Kong dollar would lead the monetary authority to push up interest rates to defend the peg, which in turn would push down the stock market, meaning the speculators could pocket the profit from their short position on the index futures.
The official said then HKMA chief executive Joseph Yam Chi-kwong and secretary for financial services Rafael Hui Si-yan wanted to use the Exchange Fund to buy into the stock market to support the index and hurt the speculators. They had to convince Donald Tsang Yam-kuen, who was then financial secretary.
"Tsang hesitated and did not answer phone calls from Yam or Hui for the whole day," the official said. "Tsang wanted to see the market return to normal, but it didn't. As a result, he finally agreed to the intervention."
"This is the worst time we have had since 1983," Tsang said at the time of the market intervention, which lasted from August 14 to 28.
The government ended up spending HK$118 billion, more than 10 per cent of the Exchange Fund at the time, to buy into 33 constituent stocks to support the Hang Seng Index, which rose 15 per cent as a result.
The government estimated that without the intervention, the stock market would have fallen between 2,000 and 3,000 points and interest rates would have risen to 50 per cent, the official said.
"We want to show that we mean business in the maintenance of the linked exchange rate [with the US dollar]," Tsang said after the intervention. "We are going to leave no stone unturned and incur all reasonable costs in the defence of the link."
The government later set up the Tracker Fund, an index fund tracking the Hang Seng Index, to dispose of its portfolio from 1999 through an initial public offering and then quarterly sales of a portion of the stock portfolio until 2002.
The government still holds a portfolio that represents about 5 per cent of the Exchange Fund as a long-term investment.
The government recouped HK$140.8 billion from sales of the Tracker Fund and HK$24.4 billion in dividend income. Including stocks on hand in 2002, when it stopped disposals, the government made HK$216.7 billion from the intervention, almost double its HK$118 billion cost.
The 180,000 retail investors who bought Tracker Fund units at the listing price of HK$12.88 would have also seen their money double if they hung on to them, with the fund closing at HK$24 on Friday.
Mark Konyn, the chief executive of Cathay Conning Asset Management, said the government had successfully used the Exchange Fund to defend the peg during the crisis.
"When called into action during the 1998 crisis, it proved to be an effective support for the currency and hence confidence in the economy and the stock market," Konyn said.