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Abstract
The year 1997 was a major milestone for Hong Kong: it experienced the height of the Asian financial crisis and the sovereignty handover from the United Kingdom (UK) to China. Hong Kong in sharp contrast to its neighbours came out of the turmoil relatively unscathed. It recovered quickly after the crisis in both the real and the financial sectors. Critical to protecting its reputation as a financial centre, Hong Kong was successful in defending its pegged exchange rate regime despite repeated and concerted efforts of speculators to dislodge the currency. Why did Hong Kong avoid the worst of the financial crisis?
The three main research questions posed in this thesis are: (i) What were Hong Kong's strategies in mitigating the worst impact of the crisis? (ii) Why did Hong Kong commit to the resilience of its currency? (iii) Was the recovery due to luck or deliberate interventions? These questions are answered by a combination of statistical, qualitative, and economic indicator methods.
Specifically, the Iterated Cumulative Sums of Squares (ICSS) algorithm together with GARCH modelling is employed to identify break points in the Hang Seng Index in the lead up to and during the crisis. The least square technique is then used to quantify the contributions of policies and events to the unfolding crisis. Next, the Structural Vector AutoRegressive (SVAR) model is imposed to study the contemporaneous relationships between the real and the financial sectors. This study then draws on data collected from 20 semi-structured interviews with informed commentators to investigate reasons for the resilience of the Hong Kong dollar. Before conclusion, the Kaminsky-Lizondo-Reinhart (KLR) signal approach is employed to forecast future currency crises.
The analysis shows that: (i) Hong Kong mitigated the negative effects of the crisis through timely and appropriate interventions; (ii) committing to its position as an international financial centre, Hong Kong defended its currency persistence; (iii) mainland China contributed in underwriting pronouncements to enhance regional confidence given the reunification.
Enlightened by Hong Kong's experience, exposure to currency crises can be reduced with prudent policy interventions, trans-regional co-operation, and the backing of a large and cash-strapped partner.