Asian Financial Crisis: Difficult Decisions in the Disposal of Shares After Stock Market Operation


18 Sep 2019

Asian Financial Crisis: Difficult Decisions in the Disposal of Shares After Stock Market Operation


End of Stock Market Operation: 28 August 1998

The Asian Financial Crisis hit Hong Kong in August 1998 when both the Hong Kong dollar as well as the local stock and futures markets came under heavy and sustained speculative attack by international predators, using a “double play” strategy designed to reap hefty profits by provoking panic in the financial markets and manipulating interest rates and the prices of stocks and futures. In response, the HKSAR Government decisively launched a stock market operation to defend the integrity of the financial system and the Linked Exchange Rate System of Hong Kong.

On 28 August 1998, the Financial Secretary, Mr Donald Tsang, announced the end of the operation. During those 10 trading days, the Government had mobilised the use of HK$118 billion or about 18% of the total assets of the Exchange Fund at that time to buy 33 constituent stocks of the Hang Seng Index (HSI). This amount did not include the money deployed for building long positions in the HSI futures market, all of which were unwound by the end of September of the same year. We greatly appreciated the open pledge by the Premier, Mr Zhu Rongji, that the Central People’s Government stood ready to make use of its reserves, if needed, to help Hong Kong fend off the speculators. The Central People’s Government’s pledge, offered during such a critical period, was undoubtedly a powerful boost to our confidence and morale.

On 28 August, the Hang Seng Index closed at 7,830, which was 18% above the level at which the Government started intervening on 14 August, and almost doubled the 4,000-point level that the speculators had wanted to achieve in their “double play”. On that single day of 28 August, the stock market recorded a historically high turnover of over HK$79 billion, with the Hong Kong Monetary Authority (HKMA) almost being the only buyer in town. We knew that for a fact, because the turnover was almost the same as the amount of stocks we bought that day. It was indeed a harrowing day in Hong Kong’s financial history.

When the victory was announced and the operation ended, there was still one disturbing fact: the open positions in the HSI futures market — one of the three main battlefields with the speculators along with the Hong Kong dollar FX market and the stock market — remained unusually large at more than 100,000 as they were rolled over from August into September. This suggested that even though the market predators had suffered huge losses, they had not retreated fully from Hong Kong. Would they return and redouble their attacks at the next opportunity? As it turned out, however, history was taking an unexpected sharp turn.

Butterfly Effect from Russia

We return to 17 August of the same year, when the Russian Government suddenly defaulted on its debt obligations and declared an indefinite moratorium on its repayment of foreign debt. This devastating piece of news dealt a staggering blow to international investors, including hedge funds, who were holding huge positions in the Russian Government’s US dollar-denominated debt with the prevalent opportunistic attitude that, were the Russian Government to default, Western European countries, especially Germany, would not sit idly by and were sure to go to the rescue of Russia to avoid or mitigate the destabilising spillover effects of a sovereign default. Contrary to expectations, however, Western Europe sat on its hands. The highly leveraged hedge funds, which were heavily reliant on bank credit, were thrust into deep water. In the face of such a crisis, creditor banks naturally went into self-defence mode by withdrawing their credit lines, forcing the hedge funds into a massive and sharp unwinding of their positions regardless of losses. The herd instinct clicked into gear and triggered a huge wave of unwinding of short Japanese yen positions. Within a few days in early October, the yen had appreciated against the US dollar by over 15%, revealing the aggressive amount of short positions previously held by the hedge funds. At this stage, with the “main dish” gone, the side dishes on the “menu”, meaning short positions in other Asian markets including Hong Kong, were no longer appealing. The HSI continued to rise, hitting a half-year high of 10,852 on 24 November, while the HSI futures open positions fell to a more natural level of around 50,000 contracts.

By the end of October 1998, the speculators had largely squared their positions and left the scene. While this gave us some respite, we were immediately confronted with the tricky problem of resolving challenges posed by the stock market operation. The first major challenge was to explain to the world why Hong Kong would “intervene” in the stock market even though we were, and remain, one of the greatest supporters of the free market principle. I discussed this in my article last week.

Returning Shares to Private Ownership: Establishment of EFIL

The second major challenge was to decide what to do with all the shares that the Exchange Fund had bought during the stock market operation. Some analysts estimated at the time that the Government was holding around one-third of the total amount of the 33 HSI constituent stocks circulated in the market. For most of these HSI companies, the Government had become the largest single shareholder, although it had not reached the point of wielding a controlling majority. While many Hong Kong people were supportive of the stock market operation, there were some concerns about the Government’s substantial holding of stocks. Some sceptics even portrayed the market operation as an effort to “nationalise” constituent companies in the HSI through the back door. Attention was also focused on what the Government would do with the enormous voting power it now wielded through the ownership of the stocks. Against that backdrop, I was tasked with putting in place a share disposal programme.

To allay these concerns and to demonstrate that the stock market operation had been implemented solely for the purpose of defending the stability and integrity of Hong Kong’s financial system, the Government expressly announced on 16 March 1999 that, even with sufficient shareholding, it would neither nominate any directors to the boards of the HSI companies nor interfere with the day-to-day running of these companies, except on major decisions that might materially affect the interests of the Government as a shareholder. The Government’s stance was a welcome relief to the HSI companies. But the big question remained: what would the Government do with all the HSI shares in its possession?

The answer to this major headache was by no means easy or straightforward, particularly at a time when market sentiment was still fragile and many Asian economies were recovering from the ruins of the Asian Financial Crisis. The HKMA’s first move was to set up a company, Exchange Fund Investment Limited (EFIL). We were fortunate to succeed in inviting the former Chief Justice, The Hon Sir Ti-liang Yang, to serve as the Chairman of the EFIL board. EFIL quickly established its mandate, which was to return the shares in the Government’s possession to the private sector without disrupting the market.

Share Disposal Suggestions

Suggestions and ideas on how best to dispose of the shares were soon submitted to EFIL, especially from the investment banking community. These proposals mainly revolved around conventional methods, such as book-building, block trades, auctions, or a combination of these. To me, there were several problems with these methods:

  • setting a concrete plan and timetable of disposal would give the market a clear idea of when, what, and how many of the shares would be disposed of, but this would cause a great risk that, in case of a sudden market deterioration, a fixed and pre-determined programme might bring disruptive pressures on the market;
  • selling shares only when market conditions were deemed appropriate would give EFIL the flexibility to pick the timing and the choice of shares for disposal, but the side effect was that the market would constantly second-guess which and how many shares would be sold next and when, thereby creating unwarranted volatility in individual stock prices;
  • given the huge amount of shares to be sold under market conditions that were non-bullish at the time, it seemed inevitable that discounts would have to be offered, whether the shares were to be sold through book-building, block trades or auction. There was then a real risk that traders and investors might buy the shares and flip them immediately to make a quick profit. The act of flipping, or even the mere thought of such action, would be enough to bring downward pressure on the market;
  • expectations of discounts in the next block trade or auction could cause the HSI companies themselves to hesitate in raising capital and would have long-term adverse effects on their business operations and growth prospects;
  • block trades and auctions benefit professional investors directly and tend to leave out retail participation. Given that public money had been deployed in the stock market operation, there was a case for the provision of avenues allowing retail investors to share in the fruits of the labour should they so wish.

Advent of SPDR (“Spider”)

We were caught between a rock and a hard place. There were clearly public expectations for EFIL to come up swiftly with a concrete plan to dispose of the huge amount of shares. However, none of the disposal suggestions received by EFIL were ideal, for the reasons outlined above. One day, when I was sifting through a stack of correspondence, I came across a short letter from Mr Alec Tsui, at that time the CEO of the Hong Kong Stock Exchange, who suggested studying a product in the United States known as the “SPDR”, meaning S&P Depositary Receipt, colloquially referred to as “Spider”. Basically, the SPDR is an Exchange Traded Fund (ETF) that tracks the S&P 500 Stock Market Index. Put simply, when investors subscribe to SPDR units, the fund manager will acquire a basket of shares similar to the constituent composition of the S&P Index. When the investors redeem those units, the fund manager will sell off the relevant index shares and return cash to them. So the value of SPDR units will go up when the stock market (and the index) goes up, and vice versa.

November 1999: Birth of Tracker Fund of Hong Kong (TraHK)

It quickly became obvious to me that an open-ended ETF that tracked the HSI would be an innovative and neat solution to our problem. Contrary to conventional disposal methods, the purchase of a basket of shares that replicated all the stocks in the index would unburden one from the difficult task of choosing the right stocks and the right timing to buy. The market could also avoid constantly second-guessing EFIL’s disposal plans and, by extension, reduce unwarranted market impact and price volatility. However, the SPDR, as an open-ended ETF, had taken years to earn the understanding and interest of investors. In our case, the Government was facing increasing pressure to return the shares to private ownership as soon as possible. After much deliberation, we took the unprecedented step of launching our own ETF, named “Tracker Fund of Hong Kong” or “TraHK”, in the form of an initial public offering (IPO). The advantage of an IPO was that we could conduct extensive marketing campaign to amass local and international investors within a short period of time, instead of waiting passively for the TraHK to grow organically over many years. While EFIL recognised that it had to include the Hong Kong retail public in the IPO, the process came with various operational challenges. There was inherent market risk that the HSI could fall soon after the launch of the TraHK. The Government would have no control over this and yet it would have to contend with retail investors’ complaints.

There was also the issue of what incentives, if any, EFIL should offer to investors in the IPO. EFIL’s financial advisers were initially of the view that, to generate sufficient investor appetite, a significant discount from the prevailing HSI level should be built into the TraHK issue price. While I was amenable to the idea of offering some discount in the IPO, which was a normal practice when selling large blocks of shares, I was very concerned that too large a discount would incentivise short-term flipping by investors. This was because, if investors subscribed to the TraHK at a substantial discount to current HSI levels, they could redeem the units right away at those HSI levels to turn a quick profit. If the amount involved was large, the fund manager would have to sell off an equivalent amount of shares in order to obtain the cash to redeem the units. This would inevitably lead to downward pressure on the HSI and disrupt the market, and would clearly be inconsistent with the primary objective of EFIL’s disposal programme.

Against our financial advisers’ objections, we decided to offer only a modest discount upfront, coupled with delayed incentive for retail investors. Eligible retail investors (essentially adult Hong Kong Identity Card holders with a Hong Kong address) would receive loyalty bonus units if they did not sell their units within two years after the IPO, with one loyalty bonus unit granted for every 20 units held continuously in the first year, followed by another loyalty bonus unit for every 15 units held continuously throughout both years. The issue price per unit was HK$12.88, with HK$11.50 as the effective purchase price for retail investors when taking into account the loyalty bonus.

The IPO, launched in November 1999, was a great success even without the sweetener of an instant discount. We sold TraHK units amounting to HK$33.3 billion, making it the largest IPO in Asia (ex-Japan) at that time. Thanks to a marketing campaign that highlighted the importance of creating long-term investments for the next generation, more than 184,000 Hong Kong retail investors took part. Those who have held on to their TraHK investments up to today enjoy an annualised rate of return of 7.6%, inclusive of dividends, loyalty bonus units and unit price rises. As for institutional investors, allocation priority was given only to bona fide long-term investors.

“TAP” Facility: Another Financial Innovation

Although the TraHK IPO was highly successful, it had helped the Exchange Fund to sell only a portion of the shares bought during the stock market operation, and it seemed not cost-effective to launch another large-scale public sale any time soon. The question was how to return to the market our remaining substantial inventory of stocks. Necessity being the mother of invention, we next came up with the innovative “Tap Facility”, which was unprecedented in financial history. The mechanism basically allowed market players to buy TraHK units from the Exchange Fund at a price taken from the average price of the HSI constituent stocks recorded at five-minute intervals during the same trading day. When the HSI went up during the day, the purchase price of the TraHK units would be lower than the HSI closing price for the day, allowing investors to profit from the price differential. This was in reality a type of arbitrage transaction in which investors were basically not exposed to any market risk. The arbitragers could cash out the underlying HSI stocks for the TraHK units at the stock market after each redemption. Arbitrage opportunities were also available between the futures market and the use of Tap for investors to profit from any temporary “mis-pricing” of HSI futures contracts. A limit on the amount of units for which shares would be made available under Tap was set each quarter (from Q4 1999 to Q4 2002). As a result, Tap was drawn down progressively, returning a further aggregate HK$107 billion worth of shares to the market. As share disposal via the facility would realistically take place only in a rising market and the shares sold matched the HSI basket, the impact on the market or individual stock prices was minimal. Another major attraction of Tap was that, unlike IPO or rights issuances, EFIL did not need to pay any hefty fees to financial advisers.

On 16 September 2002, alongside the announcement of the quarterly Tap limit for Q4 2002, it was announced that this would be the last Tap sale, after which the share disposal programme would end. The remaining HK$51.3 billion of Hong Kong equities would be held by the Exchange Fund as long-term investment. By that stage, the proceeds that the Exchange Fund received from the TraHK IPO and Tap Facility had totalled HK$140.4 billion (with an additional HK$24.6 billion received as dividends and other income on the shares). This helped the Exchange Fund achieve unprecedented investment returns of HK$103.8 billion in 1999 and HK$45.1 billion in 2000. The entire process of stock market operation and subsequent share disposal not only enriched the Government’s coffers substantially, but also underlined the crucial point that the operation was a right move made at the right time and proved a simple fact: the fundamentals of the market were such that it rebounded shortly after the speculators’ attack was fended off. More importantly, by returning the shares to private ownership in an orderly manner without disrupting the market, it demonstrated the commitment of the Government to the free market principle. The developments thereafter also fully manifested the Government’s determination, despite possessing influential voting power as a shareholder, to remain true to its pledge of not interfering in the normal commercial operations of HSI companies. The once-anxious private sector was eventually able to heave a long sigh of relief.


Faced with myriad obstacles in preparing for the launch of the TraHK, we were able to overcome each difficulty step by step. As the person-in-charge, I was happy to make all sorts of big and small decisions, that is, until the issue of choosing a suitable theme song for the TraHK marketing campaign came up. As it was a brand new product targeted mainly at retail investors, we obviously had to make special effort in publicity. The black and white marketing video was touching but was as yet silent and needed some background music, a task which turned out to be quite a headache. Two songs, “Sweet as Honey” by Taiwanese singer Teresa Teng and “Ripples” by local Cantopop singer Danny Chan were shortlisted after much screening. Heated debates ensued as each had its own fans among our task force. I decided to withhold my own preference and instead formed a selection panel from among my colleagues. After going through democratic procedures, “Ripples” came out ahead with a slim margin. That the choice of the theme song was perhaps the hardest decision in the whole process of launching the TraHK was indeed quite a surprise.


The HKMA has a history of just 26 years and is one of the youngest central banking institutions in the world.

When the HKMA was established, we had to start from scratch in many areas. Setting up a central banking institution with various functions, including monetary management, financial infrastructure, banking supervision, reserves management and market development, was no easy task. At the time, most of my colleagues and I were deployed from the Government with relatively limited expertise in central banking and limited resources. We did our very best to learn and seized every opportunity to gain experience in international exchanges, asking practically everything under the sun and absorbing knowledge like a sponge.

With the concerted efforts of my colleagues over the years, the HKMA has reached a level of professionalism and technical capability on a par with international standards, and is a highly reputable institution in the central banking and regulatory field.

Looking back, the years of blood, sweat and tears put in by my colleagues were all worth it. Our experiences and memories of working together and growing together are the most precious. The unfailing efforts of the HKMA and the people of Hong Kong over the years have developed Hong Kong into an international financial centre. Such an achievement does not come easily and should be cherished dearly by one and all.

In these few weeks, I have published a series of nostalgic articles about special episodes in the past. My wish is to remind my colleagues, from the perspective of someone who has come a long way, that we should persevere in breaking new ground and never give up even in the face of immense hardships and challenges. Only by moving forward tirelessly will we find a way out and reap fruitful results.

As I set down my pen, a desire to once again enjoy the TraHK promotional video prompted me to call it up on the internet. The familiar strains of “Ripples” blended peacefully with the harmonious scenes in the video, as if putting one through a cleansing after a fierce battle. Today, Hong Kong is at the centre of a vortex. It could be a downward spiral, or just ripples from a stone tossed into the water that will eventually return to peace. Which path it will take will depend on the collective wisdom of Hongkongers.



Norman Chan
Chief Executive
Hong Kong Monetary Authority
18 September 2019

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Last revision date : 19 September 2019