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

PUBLISHED : Saturday, 21 April, 2018, 2:02pm
UPDATED : Sunday, 22 April, 2018, 12:24pm

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.

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“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.

“There was a lot of panic selling, as we did not know if the interest rate would go beyond the 280 per cent, or how long it would last,” Kwong said. “We were also unsure if the rate increase would be able to hit the hedge funds who were attacking the Hong Kong dollar, stocks and futures. There were a lot of tears and fear in the dealing rooms in 1997.” 

Kwong was working at another Asia-based brokerage in 1997 when Soros – he nearly brought the Bank of England to its knees five years earlier after successfully selling against, and breaking the pound sterling – attacked the Thai baht and other Asian currencies, including the Hong Kong dollar.

The baht’s sudden devaluation came on July 1 - a Tuesday and a public holiday in Hong Kong - the same day that Hongkongers were commemorating the city’s return to Chinese sovereignty after 155 years of British colonial rule. The Hang Seng Index and property prices were near records.

The party ended when the Hibor surged to a record, driving many brokers to tears. Currency traders, on the other hand, had a jolly ride.

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“The currency traders had a happy time back then, as the strong volatility created by Soros’ attacks allowed them to make money,” said Jasper Lo Cho-yan, a senior vice-president at iBest, part of Haitong International Securities.

This mixture of fear, panic and laughs lasted for several months, during which the HKMA was initially able to control the situation, Lo said. 

However, Soros and other speculators had double plays in action, where they attacked the money market to drive up the interest rate, while short-sold futures contracts. The increase in interest rates led to a crash in the stock market, which allowed the speculators to profit from both the currency and futures markets. 

“[The situation] only returned to normal after the Hong Kong government spent HK$120 billion to buy the local dollars in the market in the summer of 1998,” Lo said. “Government intervention might be controversial, but at that point it was needed to restore order to the market.”

Cheung Tin Sang, a veteran broker who was active in the Hong Kong stock market for 60 years, called the 1997 Asian Financial Crisis the worst period in the Hong Kong market’s history, as investors and brokers were all worried that the speculators might shake the Hong Kong dollar’s peg to the US dollar.

“Back then, the markets and investors did not understand much about how the HKMA defended the peg,” Cheung said. “The HKMA in 1997 had limited tools, and could only drive the interest rate to defend the peg.”

There were a lot of tears and fear in the dealing rooms in 1997
Ben Kwong Man-bun, director, KGI Asia

Joseph Yam Chi-kwong, the first chief executive of Hong Kong Monetary Authority, was credited with leading the city’s defence against the currency short sellers. He introduced many measures to strengthen the currency’s dollar peg after 1997, including a trading band in 2005 that remains to this day.

“Those measures restored confidence,” Cheung said.

The Hong Kong dollar’s current deterioration, and the HKMA’s intervention, is nothing compared to the currency war of 1997, Lo and Kwong said.

“There is no Soros this time,” Kwong said. “The weakening of the Hong Kong dollar is due to the interest rate gap between Hong Kong and the US. The economic situation in both Hong Kong and mainland China are much better now than in 1997. There is no panic this time.”