Could short-sellers be plotting another attack on Hong Kong's currency and stock and futures markets like what happened in a terrifying moment in 1998?
Hong Kong Monetary Authority Norman Chan Tak-lam said this week that even if speculators tried to attack, Hong Kong's financial system is too big now for them to succeed.
Is he right?
Here's a look at short-selling, and why the possibility of a 1998-style attack - capitalising on the city's economic weakness due to the trade war and protests - is being talked about.
What is short selling?
Short selling is by investors who have a bearish view on a stock, benchmark or currency.
If they see a big fall ahead, they can borrow such things at their current price, wait for them to fall, then buy and replace, pocketing the gain.
It is legal.
Such type of trading is legal and can be used a hedging tool to manage risk.
What chaos can short-sellers cause?
US billionaire George Soros broke the Bank of England in short selling the pound in 1992.
He and other speculators successfully sold short and forced Thailand, South Korea, Japan, Malaysia, and Indonesia to devaluate their currencies during the year-long Asian Financial Crisis that began in July 1997.
It spilled over into Hong Kong.
Speculators including Soros deployed a "double play" strategy to manipulate both the city's currency and stock market from late 1997 to 1998.
The speculators again and again shorted both the Hong Kong dollar and stocks on the Hang Seng Index, as well as index future contract. The monetary authority raised borrowing costs to try to stop them. Panic and a credit crunch followed.
That all led to a huge spike in the overnight interbank interest rate - or Hibor - which shot up 300 per cent on "Black Thursday" October 23, 1997. The one-month Hibor rose to 10 to 20 per cent in the following months, up from the normal about 5 per cent. The interest rise sparked a huge drop in major stocks. And the Hang Seng Index went down more than 50 per cent in a year.
The speculators - who were netting huge profits - were gambling on the government not intervening.
How did the government hit back at short sellers?
In a dramatic story, some of whose details Chan only revealed this past week, the government invited the chief executives of the three largest stockbrokers in Hong Kong to the China Club for breakfast on the morning of on Friday, August 14, 1998. They were asked to finish their coffee and switch off their mobile phones, and Chan then took them to the HKMA office, he wrote in his blog this week.
"They were told in strict confidence that the government had decided to intervene in the stock and futures markets to counter the double play. They would need to go back to their offices and open stock and futures trading accounts for the HKMA immediately, as we would soon be starting the operation on the very same day," Chan said, meaning the government was entering the markets to buy.
On the first day of the intervention, because of all the government buying, the Hang Seng Index rebounded by 564 points, or 8.5 per cent. Meanwhile, the Hong Kong dollar's peg to the US dollar remained intact.
The government only announced its intervention in that evening.
After 10 trading days, on August 28, the index was up 18 per cent to 7,830, double the level of 4,000 that many media reported at the time was the level the speculators wanted to drive it down to, Chan said.
The monetary authority was complimented by Soros on a visit to Hong Kong in 2001. It did "a very good job when they intervened to arrest the collapse of the Hong Kong market."
After it beat the short sellers, the government sold the shares to the public by creating an index fund called the Tracker Fund in 1999. The Exchange Fund - the monetary authority's reserve fund to keep the local currency stable and the financial markets stable - kept about HK$51.3 billion worth of shares as a long-term investment.
By pushing up the value of stocks and the defending the Hong Kong dollar through buying, the monetary authority whipped the short sellers and saved Hong Kong from unimaginable financial chaos.
What are the differences between 1998 and 2019?
Some bearish fund managers - such as Kyle Bass, Thomas Roderick and Kevin Smith - have been talking down the Hong Kong dollar and local markets in recent months because of the trade war and protests.
But Chan said 1998 won't happen again.
"The capital market in Hong Kong has grown much bigger, which means the short sellers need to spend much more to move the markets. They would need much more bullets than two decades ago, and that would be just too expensive for them," Chan said.
The Exchange Fund is now 3.5 times larger than in 1998. The stock market's capitalisation is 8.4 times larger. Daily turnover is up to 11.5 times more. All of these make manipulation through short selling harder.
Regulation are tougher, too.
In 1998, the market did not know when the HKMA would intervene.
Now the authority requires that the Hong Kong dollar trade within the band between 7.75 to 7.85 to the USD. It also says it will report intervention quickly on its website.
The city's Securities and Futures Commission added in a number of market rules, position limits and reporting requirements to add curb son short-selling of individual stocks and Hang Seng Index futures. These limit these activities and make sure the regulators know about the large short-sellers' movement.
Despite the trade war and protests, the local stock market and banking system are considered strong.
What happens to other countries when facing short-sellers attacks?
During the Asian financial crisis, the Hong Kong dollar peg to the US dollar was one of only a few that remained unchanged due to the government intervention. Other Asian currencies weakened substantially against the US dollar as a result of speculators' attacks. The Thai baht weakened by 56 per cent, the Indonesian rupiah by 85 per cent, the South Korea won by almost 95 per cent - having to use up its foreign currency reserves. Malaysia's currency fell 50 per cent and the Japanese yen dropped 34 per cent in a year.
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