Hong Kong Monetary Authority chief executive Joseph Yam Chi-kwong says that banks that funded speculation against the Hong Kong dollar last week will be 'burned'.
In a stout defence of the authority's policies in the face of the recent speculative moves against the local currency, Mr Yam yesterday expressed full confidence in continuation of the link with the US dollar and the fundamental strength of the Hong Kong economy.
He said the authority would penalise the banks by charging them 'extraordinarily high' interest rates to cover their short positions when they attempted to settle in the next two days.
Hedge funds which sold the Hong Kong dollar last week need to borrow from the Hong Kong interbank market through their banks to cover positions. However, those which failed to tap the interbank market and needed to borrow from the authority would be penalised by having to pay at well above the prevailing official lending rate of 6.5 per cent, Mr Yam said.
'Those banks involved in the speculation will suffer by paying a high interest rate to get the Hong Kong dollar funding to settle the deals,' he said.
'We may charge them 12 per cent or even 60 per cent. The speculators will find that the funding cost for them to buy the Hong Kong dollar to settle their deals is far more than they earn from the exchange rate.
'The speculators who sell short the Hong Kong dollar will get burned and will leave the Hong Kong market.' His threat follows a week of nervous trading in the Hong Kong dollar which culminated in a bout of selling on Friday that forced the authority to again intervene to support the currency.