The operation attracted harsh criticism from various quarters, with arguments that the Government’s intervention to prop up the markets was contrary to the basic principles of a free market economy. Nevertheless, the operation has proven to be a success. During an extraordinary time of market failure, our resolute and extraordinary measures stabilised the Hong Kong dollar and the local stock and futures markets, restored confidence of Hong Kong people and investors, and helped preserve the stability of Hong Kong’s financial system. But this is only half of the story; equally important is success in engineering a smooth exit. Our biggest challenge was to release the huge amount of Hong Kong stocks amassed during the operation to the market with minimal impact on market stability. This was no easy task. In a clear message issued promptly to the market when the operation ended, the HKMA made two pledges. First, the operation was only an extraordinary measure taken at an extraordinary time. The HKMA would arrange to dispose of the stocks as soon as possible. Secondly, the Hong Kong SAR Government would not intervene in the daily operations of the listed companies concerned through its shareholdings. We fully respect and uphold the clear division of labour between the public and private sectors under the market economy. Indeed, I can still remember that following the operation, my colleagues and I worked very hard on explaining at international forums and on other occasions the rationale behind the operation and our intention to start disposing of the stocks quickly.
The Hong Kong SAR Government was facing a “double-play” by the predators – manipulation and profiteering in the money market and stock market through massive short-selling. It was a critical situation – not only were we confronted with a sharp fall in the stock market and great losses to shareholders, there were also systemic risks to our monetary system and financial markets. Classical economics does not differentiate between big and small markets and assumes that market prices will not be manipulated by just a few players. Reality, however, is different from theory. At that time, the market capitalisation of the Hong Kong stock market was only $ billion, a mere 3% of the New York stock exchange’s $ trillion. The predators were unable and hence did not choose to make their move on the big US markets, but were able to plunder Hong Kong’s mid-sized and open market with impunity. 5. However, on 14 August 1998, with the authorisation of the Hong Kong SAR Government and backed by the war chest of the Exchange Fund, the HKMA intervened in the stock and futures markets through market operation to counteract the double-play by international predators. When the market operation was completed by the end of August, the HKMA had used about $ billion to acquire a vast amount of Hong Kong stocks, propelling the HSI from the pre-operation level of 6,700 points to 7,800 points. 6.