Global Analysis on 1997 Hong Kong Financial Crisis
-
Upload
gtianyu4297 -
Category
Documents
-
view
214 -
download
1
Transcript of Global Analysis on 1997 Hong Kong Financial Crisis
![Page 1: Global Analysis on 1997 Hong Kong Financial Crisis](https://reader035.fdocuments.in/reader035/viewer/2022070521/577cc9f11a28aba711a50463/html5/thumbnails/1.jpg)
1997 Hong Kong Financial CrisisFNCE 101 001
04/24/14Group 2
Tianyu Guan, Tianran Hang, Tianni Lin, Yiran Zhang
![Page 2: Global Analysis on 1997 Hong Kong Financial Crisis](https://reader035.fdocuments.in/reader035/viewer/2022070521/577cc9f11a28aba711a50463/html5/thumbnails/2.jpg)
Roadmap
• Macroeconomic Overview
• Analysis on Macroeconomic Issues & Policies Implemented
• Exchange rate
• Interest rate
• Outcome of the Crisis
![Page 3: Global Analysis on 1997 Hong Kong Financial Crisis](https://reader035.fdocuments.in/reader035/viewer/2022070521/577cc9f11a28aba711a50463/html5/thumbnails/3.jpg)
Macroeconomic Overview
• Started in other Southeast Asia countries contagion
• Thailand, Philippine, Malaysia, Indonesia, Taiwan, Hong Kong, South Korea
• Hit Hong Kong on 23 Oct 1997
• 2 rounds of speculative attacks
• Lasted until end of 1998
![Page 4: Global Analysis on 1997 Hong Kong Financial Crisis](https://reader035.fdocuments.in/reader035/viewer/2022070521/577cc9f11a28aba711a50463/html5/thumbnails/4.jpg)
• Pegged Exchange Rate
• Since 1983
• USD:HKD=1:7.8
Macroeconomic Overview
![Page 5: Global Analysis on 1997 Hong Kong Financial Crisis](https://reader035.fdocuments.in/reader035/viewer/2022070521/577cc9f11a28aba711a50463/html5/thumbnails/5.jpg)
• GDP growth rate decreased
Macroeconomic Overview
![Page 6: Global Analysis on 1997 Hong Kong Financial Crisis](https://reader035.fdocuments.in/reader035/viewer/2022070521/577cc9f11a28aba711a50463/html5/thumbnails/6.jpg)
• High inflation
Macroeconomic Overview
![Page 7: Global Analysis on 1997 Hong Kong Financial Crisis](https://reader035.fdocuments.in/reader035/viewer/2022070521/577cc9f11a28aba711a50463/html5/thumbnails/7.jpg)
• Consumer spending decreased
Macroeconomic Overview
![Page 8: Global Analysis on 1997 Hong Kong Financial Crisis](https://reader035.fdocuments.in/reader035/viewer/2022070521/577cc9f11a28aba711a50463/html5/thumbnails/8.jpg)
• Investment declined
Macroeconomic Overview
![Page 9: Global Analysis on 1997 Hong Kong Financial Crisis](https://reader035.fdocuments.in/reader035/viewer/2022070521/577cc9f11a28aba711a50463/html5/thumbnails/9.jpg)
• Housing bubble burst
Macroeconomic Overview
![Page 10: Global Analysis on 1997 Hong Kong Financial Crisis](https://reader035.fdocuments.in/reader035/viewer/2022070521/577cc9f11a28aba711a50463/html5/thumbnails/10.jpg)
• Interest rate skyrocketed
Macroeconomic Overview
![Page 11: Global Analysis on 1997 Hong Kong Financial Crisis](https://reader035.fdocuments.in/reader035/viewer/2022070521/577cc9f11a28aba711a50463/html5/thumbnails/11.jpg)
• Unemployment rate rose from 2% to 6%
Macroeconomic Overview
![Page 12: Global Analysis on 1997 Hong Kong Financial Crisis](https://reader035.fdocuments.in/reader035/viewer/2022070521/577cc9f11a28aba711a50463/html5/thumbnails/12.jpg)
HKD Pegged to USD
• HKD had been pegged at 7.8 to the U.S. dollar since 1983
• Benefits• Eliminates exchange rate risks
• Attracts foreign investors
![Page 13: Global Analysis on 1997 Hong Kong Financial Crisis](https://reader035.fdocuments.in/reader035/viewer/2022070521/577cc9f11a28aba711a50463/html5/thumbnails/13.jpg)
Reasons of Overvalue of HKD
• High Inflation compared to the US
• Significantly higher inflation than US for a few years
• HKD devaluation
![Page 14: Global Analysis on 1997 Hong Kong Financial Crisis](https://reader035.fdocuments.in/reader035/viewer/2022070521/577cc9f11a28aba711a50463/html5/thumbnails/14.jpg)
Reasons of Overvalue of HKD (Cont’d)
• Depreciation of Southeast Asian currencies
• Southeast Asian currency (e.g. Thai baht) depreciation
• Pegged floating
• USD appreciation
• HKD (pegged) appreciation
• Underlying economic conditions unchanged
![Page 15: Global Analysis on 1997 Hong Kong Financial Crisis](https://reader035.fdocuments.in/reader035/viewer/2022070521/577cc9f11a28aba711a50463/html5/thumbnails/15.jpg)
Overvalue of Hong Kong Dollar
![Page 16: Global Analysis on 1997 Hong Kong Financial Crisis](https://reader035.fdocuments.in/reader035/viewer/2022070521/577cc9f11a28aba711a50463/html5/thumbnails/16.jpg)
Speculative Run on HKD
• In October 1997, speculators, such as George Soros, initiated speculative attack
on HKD
• Borrowed HKD
• Converted HKD to USD at the overvalued exchange rate
• Increased supply of HKD
• HKMA had to spend reserves to maintain the demand of HKD
![Page 17: Global Analysis on 1997 Hong Kong Financial Crisis](https://reader035.fdocuments.in/reader035/viewer/2022070521/577cc9f11a28aba711a50463/html5/thumbnails/17.jpg)
Speculative Run on HKD
• Speculators’ idea:
• Everyone wanted sell HKD.
HKMA needed to buy HKD, and
its reserves ran out quickly
• Fundamental exchange rate
further decreased
• Even more loss of reserves
occurred HKD devalues
profit from speculation
![Page 18: Global Analysis on 1997 Hong Kong Financial Crisis](https://reader035.fdocuments.in/reader035/viewer/2022070521/577cc9f11a28aba711a50463/html5/thumbnails/18.jpg)
Speculative Run on HKD
• Speculators’ assumptions
• HKMA would run out of foreign exchange reserves
• Declining export
• Decreasing reserves
![Page 19: Global Analysis on 1997 Hong Kong Financial Crisis](https://reader035.fdocuments.in/reader035/viewer/2022070521/577cc9f11a28aba711a50463/html5/thumbnails/19.jpg)
Speculative Run on HKD
• Speculators’ assumptions
• HKMA would run out of foreign exchange reserves
• Little government intervention on its economy prior to the crisis
• Chinese government was not likely to help out Hong Kong
![Page 20: Global Analysis on 1997 Hong Kong Financial Crisis](https://reader035.fdocuments.in/reader035/viewer/2022070521/577cc9f11a28aba711a50463/html5/thumbnails/20.jpg)
Policy to combat the speculative attack
• Pegged floating exchange rate
• Thailand, Philippine, Taiwan
• Foreign exchange reserve shortage
![Page 21: Global Analysis on 1997 Hong Kong Financial Crisis](https://reader035.fdocuments.in/reader035/viewer/2022070521/577cc9f11a28aba711a50463/html5/thumbnails/21.jpg)
Policy to combat the speculative attack
• Increase demand for local currency
• Hong Kong Monetary Authority
• More than US $80 billion in foreign reserve
• Spent more than US$1 billion to defend the local currency
• Chinese government guaranteed to maintain Hong Kong’s economic stability
![Page 22: Global Analysis on 1997 Hong Kong Financial Crisis](https://reader035.fdocuments.in/reader035/viewer/2022070521/577cc9f11a28aba711a50463/html5/thumbnails/22.jpg)
• Interest rate skyrocketed
Interest Rate
![Page 23: Global Analysis on 1997 Hong Kong Financial Crisis](https://reader035.fdocuments.in/reader035/viewer/2022070521/577cc9f11a28aba711a50463/html5/thumbnails/23.jpg)
Reasons of Increased Interest Rate
• Increase of US interest rate
(1+iHK)=(1+iUS)enom,t/eenom,t+1
![Page 24: Global Analysis on 1997 Hong Kong Financial Crisis](https://reader035.fdocuments.in/reader035/viewer/2022070521/577cc9f11a28aba711a50463/html5/thumbnails/24.jpg)
Reasons of Increased Interest Rate
• Currency board system
![Page 25: Global Analysis on 1997 Hong Kong Financial Crisis](https://reader035.fdocuments.in/reader035/viewer/2022070521/577cc9f11a28aba711a50463/html5/thumbnails/25.jpg)
Second Round of Speculative Attacks
• Short selling HK stocks
• Double-play
• Interest rate
• 15 Aug 1998
• Overnight interests rate:
8% 23%
• Briefly touching 280%
![Page 26: Global Analysis on 1997 Hong Kong Financial Crisis](https://reader035.fdocuments.in/reader035/viewer/2022070521/577cc9f11a28aba711a50463/html5/thumbnails/26.jpg)
Second Round of Speculative Attacks
• Heng Seng Index
• 1997 peak: 16,673 23 Oct 1997: 9,060 Oct 1998: 6,660
![Page 27: Global Analysis on 1997 Hong Kong Financial Crisis](https://reader035.fdocuments.in/reader035/viewer/2022070521/577cc9f11a28aba711a50463/html5/thumbnails/27.jpg)
Policy to save the stock market
• Government purchased US $15 billion of stocks
• Owned 7% of stock market
• Sell off in 1999
• Tracker Fund of Hong Kong
• US $4 billion profit
![Page 28: Global Analysis on 1997 Hong Kong Financial Crisis](https://reader035.fdocuments.in/reader035/viewer/2022070521/577cc9f11a28aba711a50463/html5/thumbnails/28.jpg)
• HKD still pegged to USD
• All other Asian countries floating exchange rate
Outcome of the Crisis
![Page 29: Global Analysis on 1997 Hong Kong Financial Crisis](https://reader035.fdocuments.in/reader035/viewer/2022070521/577cc9f11a28aba711a50463/html5/thumbnails/29.jpg)
• Took 10 years to return to GDP level before the crisis
Outcome of the Crisis
![Page 30: Global Analysis on 1997 Hong Kong Financial Crisis](https://reader035.fdocuments.in/reader035/viewer/2022070521/577cc9f11a28aba711a50463/html5/thumbnails/30.jpg)
Outcome of the Crisis
• Deflation and then moderate inflation (~4%)
![Page 31: Global Analysis on 1997 Hong Kong Financial Crisis](https://reader035.fdocuments.in/reader035/viewer/2022070521/577cc9f11a28aba711a50463/html5/thumbnails/31.jpg)
• Risks of future currency crisis?
• Lower inflation
• No contagion risk
• Successful defense of currency fended off speculative attacks
Outcome of the Crisis
![Page 32: Global Analysis on 1997 Hong Kong Financial Crisis](https://reader035.fdocuments.in/reader035/viewer/2022070521/577cc9f11a28aba711a50463/html5/thumbnails/32.jpg)
Questions?