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HK uses reserves to boost shares

World equities: Markets recover on Hong Kong government's shock intervention
THE HONG KONG government, which prides itself on non-intervention in the financial markets, yesterday took the unprecedented step of intervening on both the depressed stock and futures markets and, without announcing it, on the foreign exchange markets.

The level of the government intervention, using Hong Kong's $78.6bn (pounds 48bn) Exchange Fund, was not disclosed, but turnover on the stock exchange practically doubled from recent levels and the Hang Seng index surged by 564 points, a rise of 8.5 per cent, the ninth-biggest gain it has ever recorded in a single day.

Tung Chee-hwa, Hong Kong's Chief Executive, vowed that this intervention would not be a one-off. "We will do it time and time again in order to ensure our point comes across," he said.

Sir Donald Tsang, the Financial Secretary, said that the intervention was necessary because the local currency had come under attack by speculators using "a whole host of improper measures".

Sir Donald said that "we only contemplate intervention in very exceptional circumstances, when there is sufficient reason to believe that movements in the stock and futures markets are clearly and substantially caused by corresponding movements in interest rates engineered by speculative activity against the Hong kong dollar".

The government did not give details of which stocks it had bought. However, the blue chips showing the biggest gains were companies controlled by mainland Chinese entities. Mr Tung emphatically denied that Hong Kong had needed to seek permission from Peking before initiating its intervention.

The government only disclosed its market activities after the close of play. Surprisingly, traders were unaware that the government was out buying blue chips and Hang Seng index futures: indeed, until the reason for the buying strength was explained to them, they were highly puzzled as to why the markets had suddenly turned bullish.

However, the sudden policy about-face by the authorities was not greeted with enthusiasm by market makers. "I think investors will be slightly wary if the government is coming in to support its own market", said Miles Remington, the head of sales at SG Securities in Hong Kong. "Where will they stop?" he asked.

Sir Donald said the government "could have used covert means" to manipulate the market but "we believe strongly we should tell the public what we are doing".

The same degree of transparency has not been shown in the government's activities on the foreign exchange market where, last week, the Hong Kong Monetary Authority started buying the local currency, allegedly to make up for a shortfall in the government's cash flow.

However, Hong Kong operates a currency board system to maintain the local currency's fixed link with the US dollar. This system is designed to obviate the need to buy the local currency to protect it from speculative attacks. Instead the currency board is supposed to drain liquidity from the market when the currency comes under attack.

The government therefore seems to be undermining its own system, and with this new practice of intervening in the equity markets it is taking Hong Kong into uncharted waters.