Hong Kong Bought Its Own Stock Market to Defeat Speculators
In 1998 the monetary authority spent billions purchasing local shares to defeat a strategy that attacked the currency and the equity market simultaneously.
The Double Play
Hong Kong operates a currency board, maintaining a fixed exchange rate against the United States dollar through an automatic mechanism. Defending the peg requires allowing interest rates to rise when the currency is under pressure.
Speculators identified a strategy exploiting that mechanism. They would short the Hong Kong dollar and simultaneously short the local equity market.
If the authorities defended the currency, interest rates would rise sharply, which damages equity valuations and corporate borrowers, so the equity short would profit. If the authorities let the currency go to protect the economy, the currency short would profit.
The structure meant the defender lost on one leg whichever option it chose. That is what made the attack difficult to answer conventionally.
The Response
In August 1998 the Hong Kong Monetary Authority began purchasing Hong Kong equities directly, spending an amount reported around 118 billion Hong Kong dollars and acquiring substantial stakes in major listed companies.
The intervention broke the equity leg. Speculators who had shorted shares faced a buyer with effectively unlimited resources and a non commercial objective, so the short positions became unprofitable and had to be closed, which pushed prices higher still.
The Criticism
The reaction at the time was strongly negative. Hong Kong had a reputation as the most market oriented economy in the world, and direct government purchase of shares appeared to contradict that entirely.
Critics argued it set a precedent for intervention, distorted price discovery, and put public money at risk in equity markets. Those objections were serious and were made by people who were not obviously wrong in principle.
The Outcome
The peg held, the attack ended, and the authorities subsequently disposed of the acquired shares over several years, notably through an exchange traded fund created for the purpose, reportedly realising a profit.
The intervention is now generally regarded as successful, though it remains debated whether success justifies the precedent.
The Principle Underneath
The transferable insight concerns what defeats a speculative attack. Speculators need a counterparty with limited resources and commercial motivations. An entity with unlimited capacity in its own currency and a non commercial objective is not a counterparty they can outlast.
The same logic explains why central bank commitments to intervene in bond markets have compressed yields without requiring large purchases. A credible promise to act removes the scenario speculators are betting on.
The limitation is that the capacity is only unlimited in the currency the authority issues, which is why defending a peg against your own reserves is a losing position and why Britain lost in 1992 while Hong Kong won in 1998.
The Bottom Line
Hong Kong attacked the equity leg of a strategy designed to win either way, using resources speculators could not match. Whether it was appropriate remains debated, and it worked.