PAYAFJ
BACKGROUND
CONFIDENTIAL
HONG KONG STOCK AND FUTURES EXCHANGES
1.
The Hong Kong Stock and Futures Exchanges have been hard hit
by the current turbulence in world markets. After losses on 19 October both markets closed for the remaining four trading days of
the week. It became apparent that speculators on the Futures Exchange would be in severe difficulty when markets reopened: their
default could have a knock on effect on the Stock Exchange and potentially on the position of the Hong Kong dollar.
2.
The Hong Kong Government accordingly sought advice from City experts and on 25 October put in place a support package in the form of a HK$2 billion loan facility for the Futures Guarantee Corporation ($1 billion from the Exchange Fund, with a matching $1 billion provided by financial institutions).
3.
When markets reopened on 26 October the Hang Seng index fell by over 30%, causing a potential loss to the Futures Guarantee Corporation which exceeded even the enlarged support facility. Accordingly early on 27 October the Hong Kong Government announced that a further HK$2 billion would be made available ($1 billion from
the Exchange Fund and $1 billion shared between the Hong Kong and Shanghai Bank, the Standard Chartered Bank and the Bank of China).
4.
The administration of the Exchange Fund is, except in certain
specified exceptional circumstances a matter for the Hong Kong
Government. But Ministers were consulted about the decision to use
it on this occasion, and gave their agreement to it.
5. The most recent development has been the announcement by the Hong Kong Government that it will appoint a Securities Review Committee to examine critically the management and operation of the
Stock Exchange, the Futures Exchange and the existing watchdog
bodies. In the meantime markets appear to have stabilised somewhat, although the situation remains fragile.
CONFIDENTIAL