Under Hong Kong's currency board system, which is used to maintain the US dollar peg, the government is supposed to keep the currency stable by withdrawing liquidity from the foreign exchange market. This makes it difficult for speculators to take positions in the Hongkong dollar without incurring heavy costs from high over-night interest rates.
But by going into the equity markets "to restore order", as the financial secretary Sir Donald Tsang, put it, the government is in effect admitting that the currency board system is not working. The move has given holders of Hong Kong equity an opportunity to get out of a market they see as inherently weak.
Sir Donald yesterday said it "intends to hold these stocks for a while and they should be a good long-term investment". He added: "We have switched part of our foreign reserves into blue chips that have been bought at very good prices."
Given that Sir Donald has pushed up the price of the stocks he is buying, this is an unusual assertion. Indeed, he has pushed them up to a level which most analysts believe will only be sustainable if the government continues to make forays into the market.
The government has spent more than HK$100bn (pounds 7.6 bn) of its fiscal reserves buying shares in an attempt to thwart speculators who, the government claims, have been taking massive short positions in local shares and creating an atmosphere of weakness.Reuse content