Hong Kong Three Years Later.

• Author: WYATT, PHILIP
• Position: Brief Article

An economic report card after three years of "special autonomy."

After three years of "special autonomy," the unexpected happened to Hong Kong. The People's Republic of China (PRC) left Hong Kong pretty much to its own devices. Public fear of Mainland intervention has been replaced by a view of poor political leadership. Unfortunately, July 1997 not only saw the inauguration of Hong Kong as a Special Autonomous Region (SAR) of China, but also the start of the Asian financial crisis.

The collapse of overvalued stock and property markets was the first test of the government, specifically the Hong Kong Monetary Authority's (HKMA) attitude towards intervention in financial markets. Speculators engaged in a series of sales of Hong Kong Dollars on spot and forward markets. The HKMA followed the rules of its currency board system and in one attack, overnight interest rates rose to over 100 percent, creating a semipermanent interest premium on Hong Kong Dollar paper. However, in an unprecedented move the HKMA also intervened in the equity market to alleviate "overshooting." This was caused by short-selling of index futures by (mostly) the same speculators -- what the HKMA referred to as "double play."

The Hong Kong Dollar currency board system survived intact, but the equity market fell by over 50 percent during the second half of 1997. The HKMA confused many market players and accumulated an embarrassingly large portion of the Hang Seng Index. This was hardly in line with free-market principles. Clearly, the HKMA reached the bruits of its traditional policy of positive non-interventionism. Afterwards, it had a big job persuading the markets that its equity intervention was not a departure from its primary role of maintaining the Hong Kong Dollar/U.S. dollar link.

The equity market recovery in 1999 enabled the government to kill two birds with one stone. The HKMA divested some of its equities in a non-market intrusive way while the government launched its first Mandatory Provident Fund (MPF) units -- on a voluntary basis. Unlike Singapore and Malaysia, Hong Kong had no mandatory occupational retirement scheme. The initial MPF success signified a fresh start for the new government.

In other areas of economic policy (including the property market), however, the Hong Kong government was constrained by the recession. Its hands were tied by the fiscal prudence measures in the Basic Law (BL), by the maintenance of the Hong Kong Dollar/U.S. dollar fixed...