And as if this was not blatant enough, all this occurred in a climate of malicious rumors about the RMB and the Hong Kong dollar, glorified by publications from the so-called in-house currency strategies and analysts, and by the usual “reliable information from authoritative sources”. Well, it did not quite work out the way they intended. They miscalculated on two counts. First, they did not factor in the need for the HKSAR Government funding this year’s budget deficit, unexpected at the time when the budget was drawn up, through a drawdown of foreign reserves. And so the currency board adjustment mechanism involving sharply higher BIS Review 85/1998  -4-  interest rates was not triggered. Second, they did not realize that the HKSAR Government was far from the sitting duck they thought we were. Committed to the free market as we may be, we took the view that free markets do not mean that markets can be freely manipulated. They need to be fair markets as well. We have a responsibility to tackle market manipulation and avoid serious market dislocations developing. So after much agonizing we acted on two fronts. First, we intervened in the stock and futures markets to deter market manipulation, by making sure that the manipulation did not pay off. Second, we followed this action through with various measures to strengthen our monetary and financial systems. On the monetary side, we introduced technical measures to modify our currency board arrangements of our linked exchange rate system to make it less susceptible to manipulation.
On 14 September 1998, he wrote: “the more I think about it, the more sympathetic I become toward the Hong Kong Monetary Authority and its stock market intervention”. David Hale of the Zurich Group also said that: “it is difficult not to sympathize with the frustrations and anxieties which compelled... the government of Hong Kong to intervene in the stock market”. And last week George Soros said in Washington, when asked what he thought of Hong Kong’s actions in the stock market: “I can’t really disapprove”. My correspondence with Alan Greenspan is still ongoing: while I continue to point out to him that we were only trying to deter market manipulation, which in any case is against anti-trust laws in the US, he still has doubts. This is because of the difficulty in distinguishing between what he calls “conventional, albeit sharp-eyed, arbitrage and speculative BIS Review 85/1998  -2-  activities” in financial markets and what I call market manipulation. I shall persevere. In my view, whilst distinguishing between the two is difficult, it is not impossible, particularly when you are close to it. Perhaps I should deploy Chairman Greenspan’s argument for the Fed’s involvement in Long Term Capital Management in justifying our case. Instead of deterring market manipulation, I could say, in Alan Greenspan’s words, that we were trying to “avoid possible serious market dislocations that could have potentially impaired the economy”. But whatever argument we use, it is my firm belief that our actions, whilst controversial, are well justified.