On August 28, 1998, the fifth floor of the new wing of the Hong Kong Convention and Exhibition Center was filled with an atmosphere of tension and excitement. The investment banking elites in dark suits were in a hurry, and the undry sweat stains and tight faces on their foreheads remained the thrillingness of the financial storm.

In the front hall of the Great Hall filled with flower baskets, the new general manager Gao Xiqing announced that China's new international investment bank, Bank of China International Holdings, was officially established.

But what really shocked the air was the speech of Mr. Tung Chee-hwa, then Chief Executive of Hong Kong, "Hong Kong has been held! The contact exchange rate system has not been shaken!"

Today in 2025, this mechanism that has experienced the test of stock market crash in 1987, the Asian financial crisis in 1997, and the 2008 financial crisis has once again ushered in a historic test.

01 Cumulative investment of over 100 billion Hong Kong dollars in four days

In the early morning of May 6, 2025, the electronic screen on Wall Street in New York had just turned off the transaction data. The Hong Kong Monetary Authority's emergency operation instructions have crossed the Pacific Ocean - US$7.812 billion sold was taken down, and HK$60.543 billion liquidity poured into the market like a tide.

This is the third heavy blow by the Financial Management Bureau in four days. While the scale of a single investment has been refreshed, the cumulative investment has reached HK$116.614 billion.

The hour hand was called back to May 3, when the Hong Kong dollar exchange rate hit the strong red line of 7.75, HK$46.539 billion rushed into the banking system like the opening of the gate. This is the first time that the strong party’s redemption guarantee has been triggered since October 28, 2020. 48 hours later, HK$9.532 billion was injected again.

Hong Kong Monetary Authority's recent investment in the market

Hong Kong Monetary Authority's recent investment in the market

Behind the three waves of capital torrents is the rapid rotation of Hong Kong's linked exchange rate system. Starting from 1983, this system pegs the Hong Kong dollar to the US dollar, and the exchange rate remains within the range of HK$7.75 to 7.85 to 1 US dollar.

When international capital flows into Hong Kong in large quantities, the market demand for the Hong Kong dollar surged, driving the Hong Kong dollar exchange rate to strengthen. Once the exchange rate reaches the strong exchange guarantee level of 7.75, the Hong Kong Monetary Authority will intervene in the market, buy US dollars and sell Hong Kong dollars, increase market liquidity and prevent the exchange rate from rising further.

On the contrary, when capital outflows lead to an increase in the selling pressure of the Hong Kong dollar, the exchange rate may fall to the weak exchange guaranteed level of 7.85. At this time, the HKMA will operate in reverse, buying Hong Kong dollars and selling US dollars to support the exchange rate.

This two-way adjustment mechanism seems simple, but it is actually a key measure for Hong Kong to deal with the 1983 currency crisis. At that time, the Hong Kong dollar exchange rate plummeted to a historical low of 9.6 to 1 US dollar, and the establishment of the exchange rate system promptly curbed the crisis.

Nowadays, the linkage exchange rate system has once again become an important means to stabilize the financial market. However, what reflects behind it is a complex picture of profound changes in the global monetary system.

The U.S. government's capricious tariff policies have exacerbated market concerns about the U.S. recession, and international investors' willingness to hold U.S. assets is also weakening. Even Buffett mentioned the risk of the depreciation of the US dollar many times at the shareholders' meeting, and bluntly said, "We don't want to hold any currency that we think will depreciate."

Bloomberg data shows that indicators measuring the performance of Asian currencies soared to their highest level since 2022 last Friday, while indicators measuring foreign exchange returns in emerging markets hit record highs. As major currencies weakened against the US dollar, the RMB and Hong Kong dollar appreciated against the US dollar.

It is hard not to remind people of the situation during the Asian financial crisis in 1998. With the implementation of the Hong Kong dollar's linked exchange rate system, it has become the focus of international speculators' attacks.

02 "Oriental Normandy" fights against the enemy

In the summer of 1998, there was a suffocating tension in the air in Hong Kong. This international financial center, which has just returned to the embrace of the motherland, is facing a life-and-death battle without gunpowder.

International speculators led by Soros turned their greedy eyes to Hong Kong after sweeping Southeast Asia.

Hedge fund giant Soros

Hedge fund giant Soros

They are like a group of bloodthirsty sharks, trying to tear apart Hong Kong's linked exchange rate system and make this Oriental pearl the next "ATM".

The prelude to this storm began as early as October 1997.

Some speculators adopt a "dual-line combat" strategy: on the one hand, they sell Hong Kong dollars to the US dollar on a large scale in the foreign exchange market, and on the other hand, they establish huge short positions in the futures market, attempting to make huge profits by forcing the Hong Kong dollar to decouple from the US dollar.

This financial encirclement caused Hong Kong interbank rate to soar to an astonishing 300%, and the Hang Seng Index and its futures contracts plummeted by more than 1,000 points. According to statistics, speculators sold more than HK$40 billion in the first round of attacks alone and cashed out billions of HK$ through the securities market.

International speculators who tasted the sweetness then became more and more aggressive, launching multiple rounds of attacks in January and May 1998. This "three-dimensional" short selling strategy has put the Hong Kong financial market in a vicious cycle.

Investors who have tasted the sweetness continue to play with the same trick. In January and May 1998, the same scene was released in Hong Kong again and again. Western public opinion jokingly claims that Hong Kong has become an "ATM" for international investors. Once they lack money, they only need to press a few buttons on this ATM.

Hong Kong Monetary Authority President Ren Zhigang used "any move" - ​​significantly raising short-term loan interest rates. Although the exchange rate has temporarily stabilized, it has cost the real economy a heavy price. The financing costs of small and medium-sized enterprises soared, the real estate market was halved, and some families were on the verge of bankruptcy.

Ren Zhigang, then president of the Hong Kong Monetary Authority

Ren Zhigang, then president of the Hong Kong Monetary Authority

However, this is just the tranquility before the storm.

In August 1998, the decisive battle came.

On the 5th, speculators sold HK$20 billion in a single day. The HKMA changed its passive attitude and used all fiscal reserves to absorb them; on the 6th, it sold another 20 billion. The HKMA not only accepted the orders, but also injected the HK$20 billion into the banking system to stabilize the interest rate.

Tung Chee-hwa, then the governor of the Hong Kong Special Administrative Region, made a speech, saying: Maintaining the exchange rate is the most unswerving policy of the SAR government. "If someone thinks we will be shaken, they are wrong! We are absolutely capable and determined to maintain the linked exchange rate, and we will definitely do it. Maintaining the linked exchange rate will ensure Hong Kong's long-term economic vitality and interests, and the short-term pain is acceptable." Tung Chee-hwa is quite tragic, like the "Oriental Normandy" fighting against the waves.

On August 14, the Hong Kong government announced that it would use foreign exchange funds to enter the market directly, launching a "street battle" with speculators, causing the Hang Seng Index to rebound by more than 560 points that day, an increase of 8%, and close at 7224 points.

But the real fierce battle took place on the 28th - the Hang Seng Index Futures Settlement Day.

On that day, the transaction volume of HK$79 billion set a historical record, equivalent to HK$160 million rolling on the blade per minute.

The SAR government is like an isolated city. Faced with the overwhelming selling orders, the then Financial Secretary Tsang Yin-kuen ordered: "Eat all!" The Hang Seng Index was finally frozen at 7829 points, 329 points higher than the 7500 points that speculators built positions.

When the closing bell rang, Tsang announced: "Hong Kong won!"

Behind this victory is an economic game beyond textbooks.

International speculators first short the Hong Kong dollar in the foreign exchange market to push up interest rates, then short blue-chip stocks in the stock market, and finally amplify returns through futures contracts.

Hong Kong's counterattack was also fierce - using HK$120 billion in foreign exchange funds to enter the market directly, equivalent to 13% of the foreign exchange reserves at that time, and the scale even exceeded the US$7.7 billion of the "British Pound Defense War" in 1993.

More importantly, the central government sent two deputy governors of the central bank to take charge of Hong Kong. Premier Zhu Rongji's promise to "defend Hong Kong at all costs" became the last straw that broke Soros's back.

03 Stabilizing the exchange rate means stabilizing confidence

In order to consolidate the hard-won fruit of victory, the Hong Kong Monetary Authority decisively launched seven technical measures to strengthen the linked exchange rate system on September 7, 1998, including the ability to convert the Hong Kong dollar to US dollars at a fixed exchange rate.

Subsequently, the SAR government successively issued 30 supporting policies aimed at improving the regulatory transparency of the securities and futures markets and effectively curbing speculative behavior of transnational capital.

The Hong Kong dollar defense war: From 1998 to 2025, a financial secret war that never ends

Hong Kong media vividly called this series of measures "seven moves and thirty moves", which not only coincides with the names of traditional Chinese martial arts, but also vividly reflects the systematic layout of Hong Kong's financial defense system.

On December 6, 1999, the Hong Kong stock market ushered in an important milestone - the Hang Seng Index successfully broke through the 16,000-point mark and finally closed at 16,168.62 points. This breakthrough marks that after more than two years of adjustment and recovery in the Hong Kong securities market since the outbreak of the Asian financial crisis in 1997, it has finally regained its important psychological barrier of 16,000 points.

The Hong Kong dollar defense war: From 1998 to 2025, a financial secret war that never ends

History always spirals.

When global capital collectively turned to Asian currencies due to cracks in the US dollar's credit system, the pressure on the passive appreciation of the Hong Kong dollar has far exceeded market expectations, and the game has shifted from "swords facing each other" to "internal force competition".

Behind this is the reconstruction of the global economic structure. The essence of the 1998 crisis was the exposure of the fragility of the Asian financial system, and the capital torrent in 2025 marked a historic turning point between the loosening of the dollar's hegemony and the eastward movement of the global economic territory.

Nanhua Futures analysis pointed out that from the perspective of medium-term fundamentals, the outlook for US economic growth continues to be sluggish, and its structural dilemma has not been fundamentally reversed, which constitutes a substantial constraint on the strengthening of the US dollar.

The data is the most convincing: in the second quarter of 2025, the Hong Kong dollar has appreciated by 0.4% against the US dollar, and this trend is still continuing.

It is worth noting that Hong Kong's foreign exchange reserves have jumped from US$92.8 billion in the defense war in 1998 to US$420 billion in 2024, and financial defense capabilities have achieved a qualitative leap.

The response strategies of the two crises are more mirror contrast. After the battle in 1998, the Hong Kong Monetary Authority issued new regulations to restrict short selling and foreign exchange, securities trading and settlement, which greatly restricted speculators' speculation. At this moment of 2025, China is promoting the "offshore RMB market construction" and "expanding the Hong Kong Stock Connect".

The two crises seem opposite, but point to the same proposition: financial sovereignty is essentially the product of institutional design capabilities and crisis response speed.

When hundreds of billions of Hong Kong dollars hit the market, it is not only technical regulation, but also a preview. If the hegemony of the US dollar is further loosened, how will Hong Kong, the "oriental button", tie the first button of Asian financial security?

Perhaps, the real enlightenment of 2025 is: when the Hong Kong dollar becomes the flood discharge gate of the global capital torrent, stabilizing the exchange rate is stabilizing confidence, and confidence is a more precious currency than gold.

References:

"Today 21 years ago, that thrilling battle to defend Hong Kong! 》China Youth Daily

"Hong Kong Monetary Authority injects three investments in four days to maintain stability in Hong Kong dollars" Financial magazine

[Editor in charge: Xie Wei PF123]