Hong Kong:1997 Asian Financial

CrisisGroup: Caleb Mangohig, Nina Asmoni, Karson Taylor, Daniel Pho

Abridged History of Hong Kong

1841-1898 Hong Kong territory ceded to

Great Britain

99 year lease

Started in 1898

Expired in 1997

Transfer of Authority from Great Britain to China occurred June 1997

History Leading up to Financial Crisis

The 1980’s rising levels of emigration in anticipation of 1997’s handover

1987 financial crisis

April 4th, 1990 Hong Kong Basic Law was accepted

“One country, two systems”

Hong Kong government addresses internal and external affairs Financially independent

People’s Republic of China is responsible for defense and foreign policy

Government

Head of Government – Chief Executive Tung Chee-hwa (1997 - 2005)

Executive Council – enacts policies

Secretaries Financial Secretary:

Donald Tsang Yam-kuen (1997-2001)

Ministries

Hong Kong Monetary Authority (HKMA)

HKMA acts as both Hong Kong’s Central Bank

Issues Hong Kong Dollar

Currency Board Reports to Financial

Secretary

HKMA Chief Executive: Joseph Yam (1993 – 2009)

The Beginning of the 1997 Asian Financial Crisis

Hong Kong's small, open economy is vulnerable to events outside its control

The Asian financial crisis began with devaluation of the Thai baht.

October 23rd, 1997 Hong Kong’s Stock Index falls 10.4%

Wiped $29.3 billion off the value of stock shares

What caused the Asian Financial Crisis? Probable causes: 1. Attack on the monetary market

2. Liquidity Problem

3. Government

1. Attack on the Monetary Market

The East Asian currency was collapsing

Short-term commercial bank loans Dominant form of capital inflow in East Asia

Caused: domestic booms and asset market inflation

Balance of payment came under pressure due to market sentiment that caused investors to pull out

Speculative attacks Illiquidity problem Inability to rollover short-term bank

loans

Banks demanding immediate repayment caused sector to freeze up

2. Liquidity Problem

Balance sheet vulnerability Caused by the weaknesses of Asian Banks, Non-

Banks & Corporations

Banks depended on direct finance (i.e. short-term bank loans) for investment capital with high debt-to-equity ratios

Weakness exposed to currency mismatch and maturity mismatch Mismatch causes currency depreciation

Bank balance sheets were badly hit

Caused a lack of cash and an inability for banks to repay investors

Insolvency

3. Government

Banking problem Pre-modern corporate sector: no transparency

Unhealthy relationship between government and big businesses

Problem on productivity and competitiveness Heavy dependence on exports

Political backwardness and lack of democracy

Affects of the Crisis on Hong Kong’s Economy

Gross Domestic Product

Hong Kong’s real GDP fell in 1998

GDP Growth was volatile, Fall in 2001 - US “dotcom

bubble” Fall in 2003 - SARS crisis

By 2004, real GDP began to grow

Exchange Rate Fluctuations

Hong Kong’s currency is pegged at a fixed exchange rate with the US Dollar

Rate is set at 7.75 HK$/US$

Maintains monetary stability

However, there is room for fluctuations:

1996 7.7343 HK$/US$

1997    7.7421 HK$/US$

1998    7.7453 HK$/US$

1999    7.7575 HK$/US$

2000    7.7912 HK$/US$

2001    7.7990 HK$/US$

Inflation and Deflation

Hong Kong experienced high inflation in the early 1990s

Then high deflation following the Asian Financial Crisis

Unemployment Rates: 1994 1.9% 1995 3.2% 1996   2.8% 1997   2.2% 1998   4.6% 1999 6.2% 2000 4.9% 2001 5.1% 2002 7.3% 2003 7.9% 2004 6.7% 2005 5.6% 2006 4.8%

Changes in Labor Cost Rate:

1998 +8.5% 1999 -3.1% 2000 -1.0% 2001 +2.5%

Labor Market

Government Spending Budget fell into deficit in

1998

All the major categories of recurrent expenditures increased steadily i.e. personnel-related

expenses, health, education, social welfare

Businessmen benefit from inflation

Businesses were profitable in the early 1990s

Firms closed down in period of the deflation following the Asian financial crisis.

Wage earners suffer in times of inflation.

But deflation gives them greater purchasing power.

Business Bankruptcies and Consumer Spending

How the Crisis Was Resolved

To stabilize its currency while inflation soared Hong Kong pegged its currency to the US Dollar

Hong Kong used its cash reserves This was short lived when the crisis got more severe

Government incidentally raised interest rates to 28% and then as high as 280%

The Hong Kong Monetary Authority used its ties with China for help on controlling its monetary policy

Backed by large monetary powers helped Hong Kong get through the crisis

The Hong Kong government and HKMA now believe that being financially independent is the best way to sustain themselves. In order to resolve the crisis and keep it from it happening again,

Hong Kong has made sure that the banking system is more liquid and has high cash reserves.

They can also deal with shocks more easily because of their large cash reserves.

Hong Kong has also made sure to keep a fixed exchange rate with the United States in order to have their deficits and debt not affect their exchange rate. This exchange rate is being fixed by the large amounts of foreign

currency reserves that the Hong Kong government now holds.

This is what they believe will keep them from having to deal with another large financial crisis in which they need to be bailed out of.

Works Cited: https://www.cia.gov/library/publications/the-world-factbook/geos/hk.html

http://www.bbc.com/news/world-asia-pacific-16526765

http://www.gov.hk/en/about/govdirectory/govstructure.htm

http://www.hkma.gov.hk/eng/about-the-hkma/hkma/about-hkma.shtml

http://fas.org/man/crs/crs-asia2.htm

http://www.fednewyork.org/research/economists/pesenti/whatjapwor.pdf

http://www.grips.ac.jp/teacher/oono/hp/lecture_F/lec11.htm

http://www.karyiuwong.com/confer/seoul02/papers/groenewold.PDF

http://www.economist.com/node/9432495

http://unpan1.un.org/intradoc/groups/public/documents/APCITY/UNPAN014330.pdf

http://www.nationsencyclopedia.com/economies/Asia-and-the-Pacific/Hong-Kong-MONEY.html#ixzz3XsJh1GzE

http://www.tradingeconomics.com/hong-kong/gdp-growth-annual

Works Cited Continued:

http://www.bis.org/publ/bppdf/bispap20j.pdf

http://chinaperspectives.revues.org/774

https://www.law.upenn.edu/journals/ealr/articles/Volume5/issue1/SalvatoreCampano5E.AsiaL.Rev.1%282010%29.pdf

http://www.federalreservehistory.org/Events/DetailView/51

The Three Routes to Financial Crises: The Need for Capital Controls

"Analyzing Systemic Risk with Financial Networks During a Financial Crash"

The Asian financial crisis ten years later: assessing the past and looking to the future

http://www.wright.edu/~tdung/asiancrisis-hill.htm

http://www.dcmccornac.com/xcourses/AEconEastAsia/articles/Khor%20MartinThe%20Economic%20Crisis%20in%20East%20AsiaCausesEffectsLessons.pdf