##ocation or overshooting, with asset markets ratcheting down every time this double play is staged. this can be highly damaging to the stability of the whole financial system of hong kong. it also presents the serious risk of undermining general confidence in our currency. our aim has been to deter market manipulation, not to jack up the market. the second accusation is that we panicked because the pain of adjustment with a fixed exchange rate, including the interest rate pain arising from capital outflow under the currency board arrangements, had become unbearable. we did not panic. we were trying to prevent the market panic and overshooting that those manipulating our markets were trying to engineer. and hong kong is prepared and well equipped to bear the inevitable pain of economic adjustment necessitated by the financial turmoil that originated in this region and is now spreading to the developed markets. as head of the hong kong monetary authority i have repeatedly been asking our community to stick it out. we have seen downward adjustments in asset markets of about 50 % in less than twelve months. while not taking a view as to whether such adjustments are adequate in the circumstances, we can do without the excessive and destabilizing interest rate volatility brought about by market manipulation. we can do without what is now clearly proven to be the excessive interest rate premium brought about by the continuous presence of the market predators. we can do without the market overshooting that many of our neighbouring economies have been made to suffer. we can do without confidence being undermined by the greed of those that are intent only on making profits at the expense of our people. we have the wherewithal to tackle the situation and we did so decisively. the third accusation is that we have dangerously departed from the currency board discipline and ventured into discretionary monetary management. we have not. and without bothering you with too much technical detail, the measures introduced recently have the effect of strengthening the currency board arrangements of hong kong rather than eroding them. there has been much confusion about this matter, stemming from the somewhat academic debate as to whether a currency board should also be responsible for the provision of liquidity to the banking system that involves an increase in the monetary base. the purists would say no to this, but they should really come down to earth and recognize that in modern day finance the majority of transactions are conducted electronically without the use of cash. for the effective operation of currency board arrangements, the organisation responsible for running the system has to manage the electronic

was large, exceeding the hk $ 30 billion accumulated by the hedge funds. piece together these facts and you will have quite a clear picture of what happened and whether there had been manipulation or a danger of serious market dislocation. your views are as good as mine ; but for what it is worth, let me give you my assessment. in contrast to october last year, when they had to pay very penal interest rates to fund their short hong kong dollar positions, during the currency attack in august this year the hedge funds had pre - funded themselves. this they did by swapping us dollars for hong kong dollars, through intermediaries, with multilateral institutions which had issued hong kong debt paper, incurring an interest cost of hk $ 4 million a day for the hk $ 30 billion position. but this was not a lot of money to them. we had reason to believe that they had been building up and maintaining quite large short positions in stock index futures. with an estimated 80, 000 short contracts held amongst these hedge funds, for every thousand - point fall in the stock market index, they stood to profit hk $ 4 billion. the cost and benefit calculation is clear. and this is the case regardless of economic or market fundamentals. so they waited for a good opportunity to sell the hong kong dollars they had borrowed, in the hope of creating a severe shortage in the money market and sharply higher interbank interest rates, thereby sending the stock market into a nosedive. and as if this was not blatant enough, all this occurred in a climate of malicious rumors about the rmb and the hong kong dollar, glorified by publications from the so - called in - house currency strategies and analysts, and by the usual “ reliable information from authoritative sources ”. well, it did not quite work out the way they intended. they miscalculated on two counts. first, they did not factor in the need for the hksar government funding this year ’ s budget deficit, unexpected at the time when the budget was drawn up, through a drawdown of foreign reserves. and so the currency board adjustment mechanism involving sharply higher interest rates was not triggered. second, they did not realize that the hksar government was far from the sitting duck they thought we were. committed to the free market as we may be, we took the view that free markets do not mean that markets can be freely manipulated. they need to be fair markets as well. we have a responsibility to tackle