Why Hong Kong Mitigated The Worst Impact Of The 1997 Asian Financial Crisis

The three main research questions posed in this thesis are: (i) What were Hong Kong’s strategies in mitigating the worst impact of the crisis? (ii) Why did Hong Kong commit to the resilience of its currency? (iii) Was the recovery due to luck or deliberate interventions? These questions are answered by a combination of statistical, qualitative, and economic indicator methods. Specifically, the Structural Vector AutoRegressive (SVAR) model is imposed to study the contemporaneous relationships between the real and the financial sectors. This study then draws on data collected from 20 semi-structured interviews with informed commentators to investigate reasons for the resilience of the Hong Kong dollar. Before conclusion, the Kaminsky-Lizondo-Reinhart (KLR) signal approach is employed to forecast future currency crises. The analysis shows that: (i) Hong Kong mitigated the negative effects of the crisis through timely and appropriate interventions; (ii) committing to its position as an international financial centre, Hong Kong defended its currency persistence; (iii) mainland China contributed in underwriting pronouncements to enhance regional confidence given the reunification. Enlightened by Hong Kong’s experience, exposure to currency crises can be reduced with prudent policy interventions, trans-regional co-operation, and the backing of a large and cash-strapped partner.