It would be naive to think that we can be right all the time. Nobody can be. We can only be less wrong. But more importantly, public support should not be built merely upon faith in an esoteric and aloof BIS Review 87/1998  -3-  HKMA being professional and acting in the best interest of Hong Kong. Whatever reputation the HKMA has been able to achieve, domestically and internationally, such support could never be sustained for long. We do run a system that, at times, inflicts considerable pain on the community. Many of the decisions taken by the HKMA are unpopular. The pain and the unpopular decisions may become too severe to bear just on the foundation of faith, particularly in the peculiar political setup of Hong Kong. 11. An essential part in the management of the political process concerning monetary issues, therefore, is to promote a better general understanding on those issues. This is not easy. Not only are those issues technical, but they are also changing all the time with the rapid changes in the global financial scene. Financial liberalization and the globalization of financial markets, encouraged by the advance of telecommunications and information technology, have drastically changed the behaviour of money. On top of all this, we have the complication that Hong Kong’s monetary system has really only started to take shape in the past ten years or so, as monetary reform measures were introduced to modernize it so it could cope with the demands and expectations of modern finance.
Piece together these facts and you will have quite a clear picture of what happened and whether there had been manipulation or a danger of serious market dislocation. Your views are as good as mine; but for what it is worth, let me give you my assessment. In contrast to October last year, when they had to pay very penal interest rates to fund their short Hong Kong dollar positions, during the currency attack in August this year the hedge funds had pre-funded themselves. This they did by swapping US dollars for Hong Kong dollars, through intermediaries, with multilateral institutions which had issued Hong Kong debt paper, incurring an interest cost of $ million a day for the $ billion position. But this was not a lot of money to them. We had reason to believe that they had been building up and maintaining quite large short positions in stock index futures. With an estimated 80,000 short contracts held amongst these hedge funds, for every thousand-point fall in the stock market index, they stood to profit $ billion. The cost and benefit calculation is clear. And this is the case regardless of economic or market fundamentals. So they waited for a good opportunity to sell the Hong Kong dollars they had borrowed, in the hope of creating a severe shortage in the money market and sharply higher interbank interest rates, thereby sending the stock market into a nosedive.