Your friend is mis-informed about the latest development in HK.
The HKMA's "incursion" into the stock market involved US18 billion, spent mostly in the last 2 days in August, 1998 when the Heng Seng Index was pushed down from 10000 to 6600 by hedge funds which accumulated short positions while they sold HK dollars to push up local interest rates. For every 1000 point drop in the HSI, the hedge funds were making US$1 billion in quick guaranteed profit. By the HKMA buying up the 15% of the equity shares, the market not only stabilized but bounced back in 6 months to the recent 13000, giving the HKMA a paper profit of US$9 billion. (For reality check, Clinton asked Congress for US$6 billion to finance the NATO war in Yugoslavia.) There is evidence that the hedge funds reversed their strategy to push up the HSI. Local corporation, led by HSBC, the parent of HK Bank, also participated in the exercise. HSBC is preparing to list soon in the NYSE.
I posted a report on how hey did this on another list earlier:
"Corporations and institutions commence a buy program to push up prices of a few lead stocks. Once an upward price momentum is generated, new high priced buys are hedged by selling low priced previous purchases, producing a paper profit with a mere shift of the date of ownership in the same shares while at the same time, market capitalization of the total shares held rises, but the total number of shares held will never exceed regulatory limits. This is a well known techniques in smaller markets like Hong Kong where a government incursion last August removed 15% of the shares from the markets at a price of US$18 billion when the HSI was at 6600 and produced a paper profit of US$9 billion by now when the HSI stands at over 13,000. With increased liquidity, it is possible that such strategies are now employed also in the huge markets like NYSE and NASDAQ. There is little doubt that the skyrocketing of internet stock prices has been at least partly caused by this strategy."
HKMA has established a public corporation to hold the acquired share, with a mission to eventually dispose the share without distorting the market. Several proposals from consultants on how to accomplished this have been under consideration. No final decision had been made so far.
Your friend may also be referring to HK's effort to develop an Asian bond market. Part of that plan is to market HK government bonds. But unlike US treasuries, these bonds are not sovereign debts, but mortgage backed security to free the banks from excessive capital requirements in their heavy involvement in housing finance. HKMA now requires local banks capital to be at 35% of total assets, as compared to 7% by international standard, and 4% in the US. Since the major source in revenue for the HK government is from cost-free land leases, with the government owning all land, the HK public finance picture is very sound, a no-brainer. The worry about HK is not that it will be ruined by irresponsible public finance, but that despite of or because of ultra conservation monetary policies, that HK will become the living (or dying) proof of an excellent financial strength in the public sector producing a declining economic pie in the private sector. This is the natural result of a currency board set at an over-valued exchange rate and a traditional aversion to post-Keyesian economic policies.
Henry
Chris Burford wrote:
> My friend, loyal to the century old traditions of the cooperative movement,
> who took such an interest in the historical relics of Hong Kong's colonial
> past, has recently expressed disappointment to me that Hong Kong is
> introducing some sort ot certificates of indebtedness to cover the
> government funds used to purchase 13% of the stock exchange last year when
> they successfully burned the raiders.
>
> He has been praising Hong Kong for having no national debt. Now he thinks
> that this step is the start of a "national debt". Does Henry or anyone else
> know if there is any truth in that?
>
> Chris Burford
>
> London