FINANCIAL AND MONETARY AFFAIRS
88
stability of the exchange value of the Hong Kong dollar and to produce sharply higher interest rates which in turn would cause sharp falls in the stock market the double market play. This would enable the speculators to benefit from the short positions that they had accumulated in the stock index futures market.
The sale of Hong Kong dollars did not lead to a contraction in the monetary base, however. The months of June to October are the usual 'deficit' season for the Treasury in which there would be sizeable net drawdowns from the Exchange Fund by the Treasury to pay for government expenses. To fund the actual and anticipated drawdowns by the Treasury, the HKMA switched some of its foreign currency reserves into Hong Kong dollars. This counteracted some of the selling pressure on the Hong Kong dollar, leaving the Aggregate Balance unchanged. Interbank interest rates only firmed slightly in early August, with overnight and one-month interbank interest rates moving around 6 to 7 per cent and 10 to 11 per cent respectively.
Shortly before the long weekend in mid-August, rumours of a devaluation of the RMB and the abandoning of the Hong Kong dollar's link with the US dollar intensified. To frustrate the double market play, the government decided to operate in the stock and futures market to counteract market manipulation and restore market order. When the Hang Seng Index futures contracts for the month of August settled on August 28, there was substantial selling pressure in the stock market and daily turnover reached a record high of $79 billion. Interbank interest rates surged across the board. Overnight HIBOR rose to an intraday high of 24 per cent during the day. One-month and three-month HIBOR firmed to a high of 22 per cent and 18 per cent. But the Hong Kong dollar exchange rate was stable throughout, moving within a range of 7.744 to 7.749.
As part of its actions to counter speculative attacks and manipulation, in early September the government introduced a series of follow-through measures to further improve both the currency market and the securities and futures markets.
In respect of the securities and futures market, the government put forward a 30- point programme with a view to strengthening the discipline and transparency of the markets. The proposed measures cover six specific areas including short selling activities, system improvement, risk management, rule enforcement, inter-market surveillance and contingency power. The programme also proposes as longer term measures full investors participation in the Central Clearing and Settlement System and the implementation of a completely scripless securities market in Hong Kong.
Most of the measures have been put in place and the remaining ones are being actively pursued in conjunction with the SFC, the two Exchanges and HKSCC.
The HKMA followed through on the operations in the stock and futures markets with a package of seven technical measures to further strengthen the currency board arrangements and make them less susceptible to manipulation. Two major planks of the technical measures are the provision of a Convertibility Undertaking and modifications to the Discount Window facility. Under the former measure, the HKMA provides a clear undertaking to all licensed banks in Hong Kong to convert Hong Kong dollars in their clearing accounts maintained with the HKMA into US dollars at the fixed exchange rate of $7.75 to US$1. The second plank is the replacement of the LAF by a Discount Window. Banks are allowed unrestricted access to the Discount Window in respect of repo transactions involving Exchange Fund Bills and Notes.