Jeff,
I am very concerned about HK stock market too, I even sent a pm to Todd regarding this. In past history, gov't intervention to the equity market are useless most of the time as we seen with Malysia and other tiny stock markets in South Asia. So my first interpretation (probably the same with many other investors) is "What the hell?", then follow with a bunch of ??????.
On Monday, gov't finally explained what actually was going on on August. And so far it seems HK gov't did the right step. Here are some highlights:
What happened in HK in past 1 years is: (my observation) Speculator attacked HKD, inter-bank rate surged and stock market plummeted. Speculator earns big money from short sell index future.
From gov't point of view: Hk gov't said that this time the speculator attack is even more severe than last October. They first felt the pressure in July and "They" sold 6.2 billion USD in the first two weeks of August against HKD, more than doubles of last October 3 billion! In 3 trading days from end of July to begin of August, there was 100,000 contracts of open interest in Index Future trading, 50% more than the peak in last October!!! But HKSE daily $volume decreased from last October's 30 billions to now only 3 to 4 billions (decreased 10 times). So speculator can pressured the stock market with little opportunity cost. If they (the gov't) didn't intervened last month, inter-bank rate would climbed to 50% (est.) and the stock market would dropped another 2000 to 3000 pts and HKD could slide as it happened in 1983. HK gov't repeatedly stated that "HK welcome any short term or long term investment, free market will not block out speculating activities as it can have positive effect. This time the intervention targeted only the market "makers". "They", unlike normal hedge fund institutions, would do everything except hedging. So gov't cannot let them think HK and HKSE as an automatic banking machine, thus the necessity of intervention. In another piece of news, HK gov't admitted that it used slightly more than expected reserve for the intervention (as budgeted on Oct 14th), mainly a result of Russian crisis and US Stock Market correction but the actual different is not too big. Some new regulations (some haven't pass yet) are introduced to improve the robustness of the HK financial structure.
- Illegal short sale and report false short sale info will becomes criminal code - subject to maximum HKD100,000 fine + 2 years prison.
- Strictly enforcement of existing T+2 settlement rule, unsettle trade will forced to settle on T+3 by market order thru HKSC.
- Forbid short sell companies at prices below the best current ask prices. (Surprise, Surprise!)
- Fully computerized the trading in HK Future Exchange (like HKSE) to increase the transparency of the system, to avoid speculators manipulating the market.
- Increase cost of Index Future trading for trade with 5000+ contracts. (if HKSE dropped only 100 pts, 5000 contracts = 25 million)
- Amount of Index Future position must not exceed principal (the money you really have) by 20%.
- Chief Executive of HK-SAR (special administration region) has the authority over SEC equivalent of HK (this is the most controversy issue).
Also a few points (my understanding only):
- HK gov't is fully in charge of this decision. HK gov't has acknowledged China gov't and China has stated that they support HK gov't decision but as usual there was no material support. They don't really care how HK is operated as long as it is belongs to China and there is no "political" crisis.
- HK is using its own money (estimated 15 billions out of its 96 billions reserve), no China money involved. After all, HK gov't is still very rich like Japan. Zero debt like THQI.
- HK gov't stated that there is no way they can identify exactly "WHO" are the speculators.
What happened in Asian (and the world) is merely a domino effect. Speculators noticed some fundamental problems (gov't corruption, bubble economy, financial institutions insolvency, inflation...), they pressured one country to devalued their currency then the equilibrium of the currency market would be disturbed. Eventually its neighborhood (with similar economy structures) must also devalue their currency because this is the only way to stay competitive relatively. Fortunately and Unfortunately, in past 10 years, HK economy has changed from healthy industrial based to solely financial based with lots of bubbles created, most manufacturers have moved north to China so export becomes less important for HK. This is the reason why HK$ still possibly pegged to USD.
I suspect HK's credit rating will be dropped again soon by Moody (like Soros, it has a lot to do with the recent Asian crisis). Jeff, I agree with you, HK intervention is either a "pass" or "blow up". So far HK seems to win the second round (thanks Greenspan) but there are always the possibility for a third or forth round! I don't think Asia will recover prior y2k but the worst may had seen.
aC
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