In this connection, let me put to you a few facts and allow you to draw your own conclusions. Fact number one: Hong Kong maintains a fixed exchange rate through a currency board system. Such a system requires any change in the monetary base to be matched by a corresponding change in the amount of foreign reserves held by the currency board, with the currency board acting passively in response to capital flows. With a very efficient financial infrastructure, characterized by a real-time interbank payment system, and in the absence of reserve requirements, banks in Hong Kong do not need to maintain large balances in their clearing accounts held with the HKMA. This means that the crucial part of the monetary base, in the form of the aggregate balance in the clearing accounts that all the licensed banks maintain with the Hong Kong Monetary Authority, is very small. This in turn makes interbank interest rates in Hong Kong very sensitive to capital flows into and out of the currency board. The sale of a small amount of Hong Kong dollars by a bank to the HKMA, which has to take it and provide US dollars at the fixed exchange rate in accordance with the discipline of currency board arrangements, could send interbank interest rates sharply higher. Fact number two: the hedge funds had been borrowing and sitting on large amounts of Hong Kong dollars.
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.