Illustration: Xia Qing/GT

There has been much talk of the risk of a rising financial crisis in Hong Kong over the past few months. Indeed, the city's economy is flashing worrying signs of vulnerability. The Hong Kong economy entered its first recession in a decade in the third quarter of this year and a severe housing bubble has made the city known as the least affordable property market in the world. The Hong Kong Monetary Authority (HKMA) had to spend more of its large reserves in recent months to support its distinctive exchange rate system.

In particular, the Hong Kong dollar is facing the greatest devaluation pressure since the 1997 Asian financial crisis amid its economic slowdown, the US-China trade war, and the riots on the streets. While the global financial system has undergone dramatic changes over the past two decades and patterns of financial crises have been changing all the time, history always repeats itself in one way or another. Therefore, a close look at the experience and lessons of the past crisis may still have relevance in terms of understanding the current situation.

In 1997, the appreciation of the US dollar precipitated hot money flows to return to the US, exposing the weakness of the seemingly robust Southeast Asian economies and thus triggering the Asian financial crisis. Thailand was the first to see the value of its currency, the baht, crash under the speculative attack by predatory hedge funds such as George Soros' Quantum Fund in July 1997. 

Then, Asian currencies collapsed one after the other: Malaysia, Indonesia, the Philippines, and even Singapore were all battered by currency speculators.

At that time, it was widely believed that Hong Kong would be no exception under the unstoppable Soros and a break in its currency peg to the US dollar would be inevitable. At the beginning, in the face of the relentless attack on the Hong Kong dollar, the HKMA responded by raising the interest rates, which soared nearly 300 percent overnight at one point in October 1997, but international speculators didn't stop shorting its currency and stock market. In the summer of 1998, the Hang Seng Index fell by more than 60 percent, and the HKMA made the call to enter the market and spend HK$118 billion ($15 billion) in stock and futures markets in two weeks of trading. After the record trade of HK$79 billion in the market on August 28, 1998, the Hong Kong Special Administrative Region government eventually won the hard-fought battle, forcing Soros and others to leave with losses.

The reason why Soros withdrew from the Hong Kong market is not because he had run out of ammunition, but because he had seen the repeated expressions of support to Hong Kong from top leaders of the central government. Even if Hong Kong had run out of ammunition, he would still have had to deal with China's central government with foreign reserves at around $130 billion at that time. The backing of the central government is an important source of confidence for Hong Kong, which sometimes is a matter of survival when it comes to the financial crisis. While it was generally believed during the Asian financial crisis that the Hong Kong government would give up its currency peg to the US dollar to relieve the pressure on its economy, it now appears that the decision of the Hong Kong Special Administrative Region government to maintain the Hong Kong dollar firm was far-sighted. 

Hong Kong's special exchange rate system is the cornerstone of its monetary system, which is closely related to the financial stability of the city, and financial stability is the foundation of Hong Kong's economic development. 

Moreover, Hong Kong is the window of the Chinese mainland to the outside world. As such, Hong Kong's defending of its currency prevented the financial crisis from spreading to Hong Kong and even the Chinese mainland. It was during the following decade that China's manufacturing sector was able to prosper in a relatively stable market environment. By comparison, other countries that were hit hard by the Asian financial crisis remained in the doldrums for quite a long period of time.

Based on the experience and lessons of countries and regions in dealing with the Asian financial crisis, it would be problematic for China to allow sharp depreciation of its currency or to tighten capital control to prevent the recurrence of a financial crisis in Hong Kong. Maintaining calm, stabilizing expectations, and strengthening communications with the market are still the best approach toward defusing any crisis. And just as in the past financial crisis, the central government is always ready to help Hong Kong.

The author is a reporter with the Global Times. bizopinion@globaltimes.com.cn