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Following is a statement by the Financial Secretary, Mr Donald Tsang, at a press stand-up session at Conference Room, New Annex, Central Government Offices this (Friday) afternoon:

As you know, over the past two weeks, with my approval the HKMA has been operating in the stock and futures markets with the aim of hitting those currency speculators engaged in a double play of dumping the Hong Kong dollar and shorting the local stocks and Hang Seng Index futures. The game plan of these speculators is to create extreme conditions in the money market by attacking the HK$ in order to cause panic and a sharp fall in the stock and futures markets. We have frustrated their plan.

Throughout the past two weeks, the HK$/US$ exchange rate has been very stable. The money market has remained orderly. Instead of benefiting from a collapse of the Hang Seng Index, the speculators had to settle their short positions in the index futures earlier today for the month of August, when the index had moved up about 1,200 points over the past two weeks. The speculators have also found it expensive to roll their short positions in the Hang Seng Index futures from August to September.

In the currency market, we have seen many speculators closing out their short positions, as a result of which the pressure on HK$ has eased somewhat in the last few days. This reinforces our assessment that it is helpful to currency stability if the currency speculators are prevented from making a parallel gain in the stock and futures markets. This took place when there are enormous turbulence in external markets arising from what has happened in Russia. The speculators can no longer expect that they can manipulate at will our stock and futures markets by attacking the currency. They can no longer be sure of any profit by such manipulative play.

As one of the freest markets in the world, Hong Kong has always been reluctant in intervening in the open market. Our policy of minimum intervention and maximum support for our business is well known. But as a respectable and responsible government we must take all the necessary steps to protect the stability and integrity of our currency and financial markets when they are under speculative attack. After the episode in the past two weeks, we still stand ready to operate in the stock and futures markets whenever the currency speculators again engage in a similar double play.

I must reiterate here that the purpose of our operations in the stock and futures markets is not to support the stock prices at any particular level. We accept fully that our asset prices must adjust in response to changing economic conditions and external environment. Indeed, such adjustments are taking place very quickly and efficiently. However, we have the duty to ensure that the asset markets adjust in an environment without serious distortions caused by market manipulation. While we accept that Hong Kong interest rates might be higher than the corresponding US interest rates to reflect the so-called "Asian Premium", the excessive volatility in our interest rates created by speculative attacks against the HK$ is totally unwarranted. Such volatility undermines our financial markets and our real economy. It generates artificial and panicky downward pressure on the asset markets leading to chaos in our financial system and creating further instability in our neighbouring economies.

We are absolutely determined to use all the means available to us to protect the stability and integrity of our currency and financial markets. Furthermore, we did not mount the market operations announced a fortnight ago in haste. They were part of an overall strategy to strengthen our financial markets. Apart from making use of the resources under the Exchange Fund within the parameters I announced on August 14, there will be follow-through policy measures to enhance our resilience to speculative attacks. These measures should reduce the need of market intervention once we have put them in place firmly.

On the monetary side, I hope to be able to announce very shortly, after consulting the Exchange Fund Advisory Committee, a number of proposals developed by the HKMA to further strengthen our existing currency board arrangements. For example, there seems to be some misunderstanding arising from the need to raise HK$ through the sale of US$ reserves by the HKMA to meet the drawdowns by the Treasury during the "dry" months. We are considering ways in which we can improve the transparency of the operations of the HKMA. This should help instil greater public confidence in our full commitment to the currency board system. Another measure we are considering is how we can address the relative small size of the Aggregate Balance of the banking system in comparison with the large unregulated capital flows. This and other specific measures would make our system even more transparent and open, but less susceptible to manipulative play that we have seen recently.

On the securities and futures side, I have asked the Financial Services Bureau, in consultation with the Securities and Futures Commission and the two Exchanges, to consider what measures we should take to make our stock and futures markets less vulnerable to manipulative practices. We have a few specific ideas. These ideas aim at providing ways and means to tighten up discipline in the areas of shortselling and stock borrowing and to enhance the transparency in the trading of index futures. Some of these ideas, if agreed to by the SFC and the Exchanges concerned, can be put in place very quickly, while others may take a longer time. Because of these consultations I am not in a position to be more specific about these ideas at this stage. The Panel on Financial Affairs of the Legislative Council has decided to discuss the government's recent operations at its next regular meeting on September 7. I hope by then we will be able to provide more details.

Our aim must be the maintenance of a level playing field in terms of investor access, information disclosure and costs of holding short or long positions. Some of the measures will require legislative backing. Once we are agreed among the trade and regulators, we will present the proposals to the Legislative Council at the earliest opportunity. I am confident that the Legislative Council stands ready to support measures designed to strengthen the robustness of our financial markets and enhance investor confidence.

In short, our commitment to an open and free market and to the linked exchange rate system is paramount. We will be vigilant in safeguarding them. And we will make sure they will continue to work well to the benefit of the public and all local and overseas investors even when external economic conditions are turbulent. It is our duty to the local community and to the stability of the regional markets.

End/Friday, August 28, 1998

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