Exchange Fund: how US$574 billion war chest defeated Soros, defended Hong Kong dollar peg in post-handover financial crises

From the Asian financial crisis to the global crisis of 2008 and beyond, the fund has played a vital role in supporting Hong Kong’s currency and markets

The current and first CEOs of the Hong Kong Monetary Authority look back on the fund’s success fighting off short-sellers and ensuring confidence

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Hong Kong’s Exchange Fund has increased eightfold to HK$4.5 trillion from just HK$568.74 billion in June 1997. Illustration by Lau Ka-kuen

Published: 8:30am, 23 Jun 2022Updated: 5:35pm, 23 Jun 2022

Hong Kong’s Exchange Fund, the HK$4.5 trillion (US$574 billion) war chest that defends the local currency, has played a vital role in maintaining the stability of local financial markets during many crises over the past 25 years.

The fund faced a test of its mettle immediately after the handover. On July 2, 1997, Thailand floated its currency in a move widely regarded as the beginning of the Asian financial crisis.

Hong Kong had to rely on the Exchange Fund to defend the local currency and financial markets against an attack of short-sellers led by George Soros, who deployed a “double play” strategy to manipulate the city’s currency and stock markets through late 1997 and 1998.

In August 1998, the Hong Kong Government spent HK$118 billion, or 18 per cent of the Exchange Fund at the time, to buy 33 constituent stocks of the Hang Seng Index, supporting the stock market in a fight against currency speculators who had built up positions in Hang Seng Index futures to profit from a falling market as they tried to break the peg.

The Hong Kong dollar was pegged to the US dollar in 1983 as negotiations between China and Hong Kong over the city’s future were under way. Photo: Reuters

“The crucial role of the Exchange Fund in defending the stability of our financial market is best exemplified in the Asian Financial Crisis,” said Eddie Yue Wai-man, CEO of Hong Kong Monetary Authority (HKMA), the de facto central bank that manages the fund.

“We claimed victory in the end, and the contribution of the Exchange Fund was written into history,” Yue said in a written interview with the Post.

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