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Following is the full text of the statement by the Financial Secretary, Mr Donald Tsang, at a press briefing at Central Government Offices this (Friday) afternoon:

Ladies & Gentlemen,

Thank you for coming to this briefing despite the very short notice.

In the last few days, there has been substantial speculative selling of Hong Kong dollars by a few investment houses, acting on behalf of hedge funds. On this occasion, we believe that the speculators' aim has been to undermine the stability of the exchange value of the Hong Kong dollar and to produce sharply higher Hong Kong dollar interest rates as well as sharp falls in the stock market. This would enable them to benefit from their very substantial short positions which they had accumulated in the Hang Seng Index futures market.

The Hong Kong Monetary Authority (HKMA) has been buying up the Hong Kong dollars by selling US dollars in the market. This is in response to the Treasury's request to draw down the fiscal reserves during the current deficit season. Consequently, the speculative selling of Hong Kong dollars has not led to any tightening of Hong Kong dollar liquidity. Interest rates in the interbank market have, nevertheless, edged up, but their rise has been more moderate than would otherwise be the case.

I must make clear that we are not against the shorting of Hang Seng Index futures by hedge funds, or indeed by anybody. But we do not tolerate attempts by speculators to manipulate our interest rates by engineering extreme conditions in the money market so that they can benefit from the short positions they have built up in Hang Seng Index futures. With turnovers becoming significantly thinner than last year, the market is vulnerable to manipulation and has recently shown signs of becoming one of the main reasons of speculators attacking the Hong Kong dollar. Instability in the stock and futures markets may in turn undermine confidence in the currency market, thereby triggering further speculative activities.

In order to achieve their objectives in undermining the Hong Kong dollar, speculators have deployed a whole host of improper measures which are clear to all. These measures include spreading vicious rumours on the delinking of the Hong Kong dollar with the US dollar, devaluation of the Renminbi, as well as the instability of our banks which led to bank runs. We have recovered from each of these speculative attacks. We have also demonstrated our resolve in maintaining our linked exchange rate. However, the sharp rise in interest rates created by speculative attacks has clearly hurt our economy and the public at large.

In order to deter such manipulation, I have exercised my power under the Exchange Fund Ordinance and asked the HKMA to draw upon the resources of the Exchange Fund to mount appropriate counter activities in the stock and futures markets. The Exchange Fund Advisory Committee, which I have formally consulted, supports this course of action. Accordingly, the HKMA mounted counter activities earlier today.

I must emphasise that our long-standing policy of non-intervention in the stock and futures markets remain unchanged. We only contemplate intervention in very exceptional circumstances when there is sufficient reason to believe that movements in the stock and futures markets are clearly and substantially caused by corresponding movements in interest rates engineered by speculative activities against the Hong Kong dollar. In other words, no intervention may take place unless a sufficiently clear linkage exists between the currency play and the stock and futures market play. Under any other circumstance, the Government will of course continue to adhere strictly to non-intervention.

End/Friday, August 14, 1998

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