On July 1, 1997, the red national flag was raised over the Hong Kong Special Administrative Region. After a hundred years, Hong Kong finally returned to the embrace of the motherland. However, while the whole country was celebrating the return of Hong Kong, international capital had secretly gathered and the army quietly gathered towards Hong Kong. Prior to this, a long-planned financial storm swept across Southeast Asia.
On July 2, 1997, the day after Hong Kong's return to China, Thailand was the first to be crushed by the financial storm. Under the fierce attack of international capital, the Bank of Thailand was forced to announce the abandonment of the fixed exchange rate system. The exchange rate of the Thai baht against the US dollar plummeted by 20% that day. The one-year and four-month battle to defend the Thai baht was completely declared a failure. The sharp depreciation of the Thai baht was like a huge rock in the water, which set off a huge wave in the entire Southeast Asian financial market.
After Thailand, the Philippines, Indonesia, and Malaysia fell one after another, and currencies of various countries plummeted like a floodgate being opened, with Indonesia’s currency depreciating to a historic low. At that time, the Prime Minister of Malaysia specifically pointed out that the well-known financial shark George Soros had come to our country, causing years of struggle for our people to go to waste overnight. The crisis rampaged through Southeast Asia, but at that time, Hong Kong had not yet realized the approaching danger.
In 1998, led by Soros's Quantum Fund, international hedge funds, after harvesting hundreds of millions of dollars in Southeast Asia, set their greedy sights on the next target. This time, they targeted Hong Kong, with Soros's legendary battle being his successful attack on the old financial hegemon, Britain, in 1992, making a profit of 1.5 billion dollars in just one month, creating history. Five years later, he replicated this success in Thailand, the Philippines, and other countries, triggering a stunning wave and successfully sparking the Southeast Asian financial storm. At that time, Hong Kong had just returned to the motherland, with confidence across all sectors of society, creating a harmonious scene. The Hang Seng index, a barometer of the Hong Kong stock market, was also experiencing a bull market, advancing vigorously. In August 1997, the Hang Seng index broke through the 16,000-point barrier, but dark clouds were quietly gathering over Hong Kong.
According to the recollections of the Chief Economist of BOC International, Eric Zhu, when the Southeast Asian financial crisis broke out, the State Council's Policy Research Office sent a five-person official delegation. The delegation mainly visited the countries and regions most severely affected by the crisis, but they completely missed Hong Kong. At that time, no one expected that soon after, the situation in Hong Kong would become so severe. The international capital attack on Hong Kong was far more complex and vicious than against the Four Asian Tigers, marking a comprehensive, multi-faceted masterclass short-selling assault. However, in that sweeping short-selling battle across Southeast Asia, the only stronghold that international capital encountered was Hong Kong. One can only imagine how many twists and turns Hong Kong endured to withstand such an attack. It is not an exaggeration to say that if the Korean War was a battle of military might, then the financial defense battle of Hong Kong in 1998 was a battle for our financial sovereignty. This marked China's debut in the world financial war. The plot was so exciting, and the process so tumultuous, that it was no less than any Hollywood blockbuster.
The external world generally marks the timeline of the Hong Kong financial defense battle as August 1998. However, in fact, this war without gunpowder began two years earlier, in 1996. In 1996, the year before the return of Hong Kong, and just before the outbreak of the Southeast Asian financial crisis, Soros secretly sent his capable operators to Hong Kong, often flying back and forth to find breakthroughs and prepare a series of battle plans. It can be seen that even the famous Soros did not dare to relax against the opponent that was Hong Kong. To deal with Hong Kong, Soros directly upgraded his short-selling theory to a cross-generational level. If the British and Thai strategies were 1.0, then Hong Kong was 3.0. This was a three-pronged siege involving stocks, currencies, and futures, with an incredibly mature and sophisticated layout and tactics.
In simple terms, it can be divided into three steps. First, accumulate a large amount of Hong Kong dollars in the foreign exchange market to prepare for future currency attacks, avoiding the high costs of temporarily raising Hong Kong dollars later on, while also secretly accumulating a large amount of constituent stocks of the Hang Seng index. This also led to a continuous rise in Hong Kong stocks from their low point in 1996, triggering a frenzy among investors, allowing the Hang Seng index to repeatedly break new highs. The ever-expanding bubble also provided fertile ground for Soros's later short-selling in the stock market. Finally, in the futures market, accumulate short contracts for index futures to prepare to buy back low after the Hang Seng index declines because the leverage in futures is very high. The short positions taken during the bear market can yield unimaginable returns, which would rely on suppressing the stock market and profiting from shorting the futures market, mutually reinforcing each other, complemented by strategies like feigning an attack elsewhere and media manipulation. It must be said that Soros has mastered the art of short-selling to perfection. Similar to the strategy of shorting the British pound and the Thai baht, the first round of attacks targeted Hong Kong's currency market.
In July 1997, international speculators began to tentatively sell off and intervene in the Hong Kong dollar, impacting its exchange rate. In July 1997, the bears sold 46.5 billion Hong Kong dollars in the foreign exchange market. In January and June 1998, international speculators sold 31 billion and 7.8 billion Hong Kong dollars, respectively. During these three speculative sell-offs, the exchange rate of the Hong Kong dollar was severely impacted. However, in order to defend the exchange rate, the Hong Kong Monetary Authority also devised countermeasures, raising market interest rates, commonly referred to by the media as raising rates. To significantly increase the cost for international speculators borrowing Hong Kong dollars, the Hong Kong Monetary Authority required punitive high-interest rates for banks that repeatedly borrowed Hong Kong dollars through the liquidity policy mechanism. Thus, overnight borrowing rates soared from 9% to 300%, creating a situation where futures were out of reach. The one who announced this regulation was Ren Zhi-gang, the founder of the Hong Kong Monetary Authority and a prominent figure in Hong Kong's financial sector. He had previously repelled international speculators attempting to short the Hong Kong dollar multiple times, relying on the tactic of raising rates, earning him the nickname 'Ren's One Move'. This time he again resorted to this trump card. Faced with high borrowing costs, the bears indeed chose to back down. However, Ren Zhi-gang was unaware that a larger conspiracy was brewing behind the scenes.
High-interest borrowing rates, while preventing the bears from advancing, also suppressed normal borrowing demand, negatively impacting the real economy. Long lines of people appeared at the entrances of major banks. Meanwhile, in the stock market, due to Soros releasing a large amount of negative news in advance, panic began to spread throughout the market as investors rushed to sell. On August 8, 1997, Hong Kong stocks officially entered a downward channel. At that time, Hong Kong had no idea that this was just the prelude to the speculators' true intentions, and Soros's real trump card. In the Hang Seng index futures market, as previously mentioned in the theory of multi-faceted attack, international speculators first accumulated a large number of short contracts for index futures, then aggressively attacked the currency, suppressed the stock market, and finally bought back the index futures at a low price during the decline to lock in profits—a perfectly executed strategy of feigning action while secretly advancing.
On August 8, 1998, Soros returned with a vengeance, launching a three-pronged assault on the currency, stock, and futures markets simultaneously, intending to end the battle for Hong Kong in one stroke. At the same time, Soros spread alarming news through newspapers, amplifying fears of a significant devaluation of the Renminbi, causing panic among the public. Black market trading of the Renminbi in Shanghai and Guangzhou plummeted to a level of 9.5 Renminbi per 1 US dollar. The pressure on the Renminbi further exacerbated the woes of the Hong Kong market, leading to a sharp decline in Hong Kong stocks. On August 10, the Hang Seng index fell below the psychological barrier of 7,000 points, on August 11 it fell below 6,800 points, and by August 13 it dropped to 6,660 points. Compared to the peak of 16,673 points on August 7, 1997, this was a decline of over 10,000 points, and countless people's wealth was devastated. The bears clamored that Hong Kong had become their cash cow, and it was only a matter of time before the Hang Seng index fell below 4,000 points. The tragic fate of Thailand seemed imminent. Facing Soros's multi-faceted attack, Ren Zhi-gang found himself in a dilemma. If foreign exchange controls were imposed, Hong Kong stocks would free-fall into despair. If left to run free, the Hong Kong dollar could devalue sharply under the assault. At that time, the exchange rate system, one of the foundations of Hong Kong, would collapse, with equally serious consequences. Whether to abandon the stock market or the currency peg was an unbearable burden. But it seemed that Hong Kong had to drink this poison, and after tossing and turning sleeplessly, Ren Zhi-gang and then-Financial Secretary Tsang Yam-kuen resolved to use foreign exchange reserves to defend both the stock market and the exchange rate.
Despite their clear understanding that Hong Kong's existing foreign exchange reserves might still be insufficient to independently face the well-equipped international bears, under Ren Zhi-gang's orders, a senior official secretly boarded a flight to Beijing. On August 14, 1998, the Hang Seng index opened lower again, just when people thought it would continue to decline. Suddenly, an enigmatic force emerged in the market, quietly absorbing countless sell orders. Driven by this force, the Hang Seng index dispelled previous gloom and began to rise steadily, rebounding by 560 points with a rise of 8.47%. At 5 PM that day, Tsang Yam-kuen officially announced at a press conference that the Hong Kong government would enter the stock and futures markets, ensuring the stability of the exchange rate while not allowing international speculators to profit from bearish futures on the index. That evening, authoritative media reported that the central government would fully support Hong Kong and would spare no effort to ensure that Hong Kong's status as a financial center in Asia would remain unshaken. In fact, the central government had always supported Hong Kong; as early as September 1997, at an international conference, the Chinese side had explicitly stated that China would maintain its stance against the devaluation of the Renminbi and take on the historical responsibility of stabilizing the financial environment in Asia. This statement effectively sent a signal to international speculators led by Soros not to target Hong Kong.
The strong entry of the Hong Kong government marked the beginning of the third round of confrontations. The government's policy was to have the Monetary Authority use both the Exchange Fund and the Land Fund to enter the stock and index futures markets simultaneously, absorbing all sell orders to raise the Hang Seng index while requiring brokerages to prohibit international speculators from borrowing stocks, cutting off their roots. The government's direct market intervention caught the bears off guard. However, they quickly stabilized their positions, using the dollar reserves accumulated during the sweeping of Southeast Asia to potentially crush most economies in the world. They believed they could defeat Hong Kong within ten days. Subsequently, both bulls and bears exchanged blows, with the Hang Seng index caught in a volatile market.
On August 26, with two days left until the settlement of Hang Seng index futures, the Hong Kong government planned to apply a slight strategy to assess the enemy's strengths and weaknesses. At 3:08 PM on the 26th, the Hong Kong government, which had always played the role of a buyer, suddenly changed its usual pattern, withdrawing all stock and index futures purchases and actively shorting the Hang Seng index futures, prompting international speculators to follow suit. In just two minutes, the Hang Seng index plummeted by 160 points, and the index futures dropped nearly 300 points. At this point, the Hong Kong government turned around and began buying back large amounts of stocks and index futures to recover lost ground. By the end of the day, the Hang Seng index slightly declined by 0.71%, causing the bulls to take a deep breath; the strength of the bears could not be underestimated, and a fierce battle was inevitable.
On September 27, the day before the decisive battle, the atmosphere in global stock markets was extremely poor, with markets in Europe, America, Latin America, and Asia all experiencing significant declines. The 33 constituent stocks of the Hang Seng index faced strong selling pressure right from the opening, with sell orders reaching 1.9 billion Hong Kong dollars in the first fifteen minutes, and the battle intensified before the market closed. A foreign brokerage firm sold 100 million shares of Hong Kong Telecom at a price of 15 Hong Kong dollars per share, yet the Monetary Authority accepted all of them. Ultimately, the Hang Seng index closed at 7,922 points, up 88 points, making the Hong Kong stock market the only one in the world to maintain a positive trend that year. On August 28, the settlement day for the Hang Seng index futures, the decisive moment finally arrived; the settlement price of the index futures was maintained for a day, with the average value of the Hang Seng index quoted every five minutes, meaning that to raise the settlement price, the index had to remain high. This meant that we had to absorb all the selling from the bears. At that time, data showed that the bears were shorting the August contracts of the Hang Seng index futures at around 7,500 points, indicating that 7,500 points was the death line for the Hong Kong government and international speculators in this showdown. At this moment, Soros was still full of confidence; he publicly declared in The Wall Street Journal that the Hong Kong government would surely fail and formally challenged the government in his own name, a move unprecedented and likely unmatched in the future.
That morning, the Hong Kong Observatory issued a thunderstorm warning, and the fate of Hong Kong and its six million residents faced a storm. On the same day, two deputy governors from the People's Bank of China and Bank of China personally rushed to Hong Kong to oversee the situation, demanding that all 24 blue-chip and red-chip listed companies in Hong Kong must make every effort to repurchase shares from the market to support the stabilization efforts. At 10 AM, the Hang Seng index opened at 7,865 points, and both sides began fierce battles on the heavyweight stock, Hong Kong Telecom. The Monetary Authority instantly filled 999 buyer positions, displaying a determination to fight to the death. The sellers also showed no weakness, with tens of millions of shares being sold in just a few minutes. Faced with the fierce assault from the bears, Hong Kong stocks were fully accepted by several major brokerages led by BOC International Securities. Meanwhile, heavy defenses were set up on the 33 constituent stocks of the Hang Seng index, with all sell orders being accepted. Within just five minutes, the trading volume of Hong Kong stocks had already exceeded 3.9 billion Hong Kong dollars. In one morning, the trading volume easily surpassed 40 billion Hong Kong dollars, several times the usual daily trading volume.
After a brief respite, a strong sell order suddenly emerged in the afternoon market from a European miracle, throwing more than it received. Within two minutes, the Hang Seng index plummeted 300 points, and the bulls dared not relax, beginning to fight back. Both sides exchanged blows, and the battle intensified. To defend the currency market, the Hong Kong government deployed every available Hong Kong dollar, with an average of tens of millions of Hong Kong dollars and US dollars being exchanged every minute. At this time, the bears concentrated their firepower on attacking the most significant constituent stock, HSBC Holdings. The then-general manager of BOC International Securities later recalled that on that day, they spent 30 billion Hong Kong dollars just to prevent HSBC from dropping by 50 cents, as just a 50-cent drop would lead to a much larger decline in the Hang Seng index. As the market approached closing time, the battle grew fiercer, with several blue-chip stocks such as Cheung Kong Holdings and CLP Holdings being frantically sold off, while Hong Kong stocks responded with indiscriminate buying. With the support of the government's power, the Hang Seng index and futures remained above 7,800 points. At 4 PM, the closing bell rang, and the Hang Seng index was locked at 7,829 points. The index futures settled at 7,851 points, a staggering increase of 1,169 points, with a rise of 17.55% compared to the position before the Hong Kong government's market intervention on August 13.
Hong Kong finally held its ground that day, with stock trading volume reaching an unprecedented 79 billion Hong Kong dollars, a record that remains unbroken to this day. Subsequently, Ren Zhi-gang, representing the Hong Kong government, announced an official statement declaring that in the battle against international speculators to defend Hong Kong's stock market and currency, the government achieved an unprecedented victory. According to statistics, in the ten trading days leading up to the settlement day of the Hang Seng index futures, the government used approximately 120 billion Hong Kong dollars of foreign exchange reserves, marking the first negative growth of Hong Kong's foreign exchange reserves that year, illustrating the severity of the battle.
However, at this point, the story was not yet over. As the Hong Kong government was about to sound the retreat, there remained a landmine that had not yet exploded. This was the unusually large number of open contracts in the index futures market, with more than 100,000 open contracts transferred from August to September. International speculators, unwilling to give up, transferred July contracts from August to September and continued to short Hong Kong stocks. Under enormous financial and media pressure, the Hong Kong government could not sustain this for long. However, this time the government did not give international speculators any opportunity. In September, the Monetary Authority introduced seven technical measures to improve the linked exchange rate system, commonly known as the 'Ren's Seven Measures', which avoided significant fluctuations in the Hong Kong dollar's exchange rate and interest rates. Once upgraded to the 'Ren's Seven Measures', the speculative space for international speculators in the exchange rate was greatly restricted, coupled with improving external circumstances, investors' information gradually recovered, and stocks even began to rise instead of fall. The theory of multi-faceted sniping no longer worked, and the bear market was over, making it difficult for them to return. The battle finally came to a complete end. Hong Kong successfully repelled the international speculators, maintained its fortress, and smiled in victory. Many years later, reflecting on this thrilling financial battle, Ren Zhi-gang felt a sense of composure and calm. Before August 13, I never dared to hope for success. After that, I envisioned many scenarios of victory, but when the moment arrived, I was surprisingly calm and peaceful, as if everything was as it should be, because coming home was wonderful. Why was Hong Kong not crushed? Because this is China, and you and I are fortunate to witness it.
Just like BlackRock in the cryptocurrency short squeeze, BlackRock won, and the market operates under the law of the jungle—survival of the fittest. Congratulations to the BTC bulls, and bears, do not be discouraged; after a comeback, how do you know BlackRock is not our ally.
The exciting weekend sharing ends here. If any content has been overlooked, please help me add. Please let me know your different opinions in the comments section. If you have contributions for the next issue, please let me know.
