Hong Kong:
1997 Asian Financial Crisis
Group: Caleb Mangohig, Nina Asmoni, Karson Taylor, Daniel Pho
Abridged History of Hong Kong

1841-1898



Hong Kong territory ceded to
Great Britain
99 year lease

Started in 1898

Expired in 1997
Transfer of Authority from Great
Britain to China occurred June
1997
History Leading up to Financial Crisis

The 1980’s rising levels of emigration in anticipation of
1997’s handover

1987 financial crisis

April 4th, 1990 Hong Kong Basic Law was accepted
“One country, two systems”

Hong Kong government
addresses internal and external
affairs


Financially independent
People’s Republic of China is
responsible for defense and
foreign policy
Government

Head of Government – Chief
Executive



Tung Chee-hwa (1997 - 2005)
Executive Council – enacts
policies
Secretaries

Financial Secretary:
Donald Tsang Yam-kuen (1997-2001)

Ministries
Hong Kong Monetary Authority (HKMA)

HKMA acts as both Hong
Kong’s

Central Bank


Currency Board


Issues Hong Kong Dollar
Reports to Financial Secretary
HKMA Chief Executive:
Joseph Yam (1993 – 2009)
The Beginning of the
1997 Asian Financial Crisis

Hong Kong's small, open economy is
vulnerable to events outside its control

The Asian financial crisis began with
devaluation of the Thai baht.

October 23rd, 1997


Hong Kong’s Stock Index falls 10.4%

Wiped $29.3 billion off the value of stock shares
What caused the Asian Financial Crisis?
Probable causes:

1. Attack on the monetary market

2. Liquidity Problem

3. Government
1. Attack on the Monetary Market

The East Asian currency was collapsing

Short-term commercial bank loans


Dominant form of capital inflow in East Asia
Caused: domestic booms and asset market inflation

Balance of payment came under pressure due to market sentiment
that caused investors to pull out

Speculative attacks


Illiquidity problem
Inability to rollover short-term bank loans
Banks demanding immediate repayment caused sector to freeze up
2. Liquidity Problem

Balance sheet vulnerability

Caused by the weaknesses of Asian Banks, Non-Banks &
Corporations

Banks depended on direct finance (i.e. short-term
bank loans) for investment capital with high debt-toequity ratios

Weakness exposed to currency mismatch and
maturity mismatch

Mismatch causes currency depreciation

Bank balance sheets were badly hit

Caused a lack of cash and an inability for banks to
repay investors

Insolvency
3. Government


Banking problem

Pre-modern corporate sector: no transparency

Unhealthy relationship between government and big businesses
Problem on productivity and competitiveness

Heavy dependence on exports

Political backwardness and lack of democracy
Affects of the Crisis
on Hong Kong’s
Economy
Gross Domestic Product
 Hong Kong’s real GDP fell in 1998
 GDP Growth was volatile,
 Fall in 2001 - US “dotcom bubble”
 Fall in 2003 - SARS crisis
 By 2004, real GDP began to grow
Exchange Rate Fluctuations

Hong Kong’s currency is pegged at a fixed exchange rate with the US Dollar

Rate is set at 7.75 HK$/US$

Maintains monetary stability

However, there is room for fluctuations:

1996
7.7343 HK$/US$

1997
7.7421 HK$/US$

1998
7.7453 HK$/US$

1999
7.7575 HK$/US$

2000
7.7912 HK$/US$

2001
7.7990 HK$/US$
Inflation and Deflation

Hong Kong experienced high inflation in the early 1990s

Then high deflation following the Asian Financial Crisis
Labor Market
 Unemployment Rates:
 1994 1.9%
 1995 3.2%
 1996 2.8%
 1997 2.2%
 1998 4.6%
 1999 6.2%
 2000 4.9%
 2001 5.1%
 2002 7.3%
 2003 7.9%
 2004 6.7%
 2005 5.6%
 2006 4.8%
 Changes in Labor Cost
Rate:
 1998 +8.5%
 1999 -3.1%
 2000 -1.0%
 2001 +2.5%
Government Spending
 Budget fell into deficit in 1998
 All the major categories of
recurrent expenditures
increased steadily
 i.e. personnel-related expenses,
health, education, social welfare
Business
Bankruptcies and
Consumer Spending
 Businessmen benefit from inflation
 Businesses were profitable in the early
1990s
 Firms closed down in period of the
deflation following the Asian financial
crisis.
 Wage earners suffer in times of
inflation.
 But deflation gives them greater
purchasing power.
How the Crisis Was Resolved

To stabilize its currency while inflation soared

Hong Kong pegged its currency to the US Dollar

Hong Kong used its cash reserves

This was short lived when the crisis got more severe

Government incidentally raised interest rates to 28% and then as high
as 280%

The Hong Kong Monetary Authority used its ties with China for
help on controlling its monetary policy

Backed by large monetary powers helped Hong Kong get
through the crisis


The Hong Kong government and HKMA now believe that being
financially independent is the best way to sustain themselves.

In order to resolve the crisis and keep it from it happening again, Hong
Kong has made sure that the banking system is more liquid and has high
cash reserves.

They can also deal with shocks more easily because of their large cash
reserves.
Hong Kong has also made sure to keep a fixed exchange rate
with the United States in order to have their deficits and debt
not affect their exchange rate.

This exchange rate is being fixed by the large amounts of foreign currency
reserves that the Hong Kong government now holds.

This is what they believe will keep them from having to deal with another
large financial crisis in which they need to be bailed out of.
Works Cited:

https://www.cia.gov/library/publications/the-world-factbook/geos/hk.html

http://www.bbc.com/news/world-asia-pacific-16526765

http://www.gov.hk/en/about/govdirectory/govstructure.htm

http://www.hkma.gov.hk/eng/about-the-hkma/hkma/about-hkma.shtml

http://fas.org/man/crs/crs-asia2.htm

http://www.fednewyork.org/research/economists/pesenti/whatjapwor.pdf

http://www.grips.ac.jp/teacher/oono/hp/lecture_F/lec11.htm

http://www.karyiuwong.com/confer/seoul02/papers/groenewold.PDF

http://www.economist.com/node/9432495

http://unpan1.un.org/intradoc/groups/public/documents/APCITY/UNPAN014330.p
df

http://www.nationsencyclopedia.com/economies/Asia-and-the-Pacific/HongKong-MONEY.html#ixzz3XsJh1GzE

http://www.tradingeconomics.com/hong-kong/gdp-growth-annual
Works Cited Continued:

http://www.bis.org/publ/bppdf/bispap20j.pdf

http://chinaperspectives.revues.org/774

https://www.law.upenn.edu/journals/ealr/articles/Volume5/issue1/Salvator
eCampano5E.AsiaL.Rev.1%282010%29.pdf

http://www.federalreservehistory.org/Events/DetailView/51

The Three Routes to Financial Crises: The Need for Capital Controls

"Analyzing Systemic Risk with Financial Networks During a Financial Crash"

The Asian financial crisis ten years later: assessing the past and looking to the
future

http://www.wright.edu/~tdung/asiancrisis-hill.htm

http://www.dcmccornac.com/xcourses/AEconEastAsia/articles/Khor%20Marti
nThe%20Economic%20Crisis%20in%20East%20AsiaCausesEffectsLessons.pdf