FINANCIAL AND MONETARY AFFAIRS
generally registered declines of around 10 to 20 per cent. The Hong Kong stock market was also affected, with the Hang Seng Index falling from around 10 700 at the end of 1997 to the 8 100 level on January 12. As the HKMA passively bought the Hong Kong dollars sold to it by the banks in accordance with the discipline of the currency board system, the sum of the clearing balances of the banking system (the Aggregate Balance) fell from $8.1 billion on January 5 to a negative figure of $2 billion on January 9. In response to the tightness in the money market, the overnight HIBOR rose from around 4 per cent to an intraday high of 13 per cent on January 9 and further to 15 per cent on January 12. The one-month and three-month interbank interest rates also rose to 19 per cent on January 12. As the liquidity shortage and the rise in interest rates stemmed the capital outflow under the automatic adjustment mechanism, the exchange rate rebounded from around 7.75 to the intraday high of 7.738 on January 12. When selling pressure on the Hong Kong dollar subsided, overnight HIBOR quickly eased back to around 5 per cent in the latter part of January. In line with the higher interbank interest rates, the savings deposit rate governed by the Interest Rate Rule (IRR) of the Hong Kong Association of Banks (HKAB) was raised by 75 bps to 5.5 per cent on January 12. The best lending rate of major banks was also raised by the same magnitude from 9.5 per cent to 10.25 per cent.
Sentiment in the regional economies started to improve in early February, with the regional currencies stabilising and the stock markets recovering. By late March, the one-month and three-month HIBOR rates came down to around 5.6 per cent and 6.6 per cent respectively, similar to the levels before the regional financial turmoil in July 1997. In line with the easing of interbank interest rates, the HKAB savings deposit rate and the best lending rate quoted by major banks were both cut by 25 bps in late March, to 5.25 per cent and 10 per cent respectively. Thereafter, despite occasional commercial selling orders of Hong Kong dollar that caused brief tightening in the money market, the Hong Kong dollar exchange rate remained stable.
In mid-June, a further weakening of the Japanese Yen to around 146 triggered substantial selling pressure in regional currency and stock markets. Selling pressure on the Hong Kong dollar emerged in the second week of June. The outflow of funds was again quickly stemmed by a reduction in liquidity and a rise in interest rates. In this episode, overnight and one-month interbank interest rates rose to 17 per cent and 18.5 per cent respectively on June 15. As the Japanese Yen rebounded sharply on June 17 on the back of joint intervention by the US and Japan authorities, the overnight and one-month interbank interest rates quickly eased to 9.5 per cent and 10.5 per cent. The more efficient and orderly interest rate adjustment was facilitated by the improved transparency of HKMA's market activities through the announcement of the forecast change in the Aggregate Balance.
Following a short period of relative calm in July, external and domestic conditions started to deteriorate in early August with growing instability in Russia and Latin America. On the back of unfounded rumours of an imminent RMB devaluation and the abandonment of the linked exchange rate system in Hong Kong, selling pressures on the Hong Kong dollar intensified. On the securities market front, while the turnover in the stock market fell substantially as the Asian turmoil in the region intensified, trading in stock index futures grew sharply. Gross Open Interest in spot Hang Seng Index futures rose from 70 000 contracts in June to some 92 000 contracts in early August. On this occasion, the speculators' strategy was to undermine the
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