Hong Kong May Use Foreign Reserves to Prevent Financial Crisis

By Wendy Leung

Oct. 12 (Bloomberg) -- Hong Kong may use all of its foreign reserves to stabilize its financial markets, said a government official, after the global credit crisis undermined investor confidence and caused stocks to plunge.

``We'll use all the ammunition if we have to,'' Julia Leung, under secretary for financial services, said in an interview with Hong Kong Commercial Broadcasting. ``Hong Kong should have faith. Smaller companies are already being hit by the lack of capital in the market.''

Hong Kong holds HK$1.4 trillion ($180 billion) of foreign currency reserves, the network cited Chief Secretary Henry Tang as saying. The benchmark Hang Seng Index plummeted 29 percent since September as the financial crisis brought down Lehman Brothers Holdings Inc., and threatens a wave of global bankruptcies.

``The U.S. ended up suffering a domino effect when the government didn't rescue Lehman Brothers,'' Billy Mak, a finance professor at Hong Kong Baptist University, said today by phone. ``Hong Kong needs to stabilize its financial market by any means or see problems in all industries.''

Foreign reserves should be used to support the local currency's peg to the dollar so as to avoid bank runs, Mak said.

Hong Kong Monetary Authority Chief Executive Joseph Yam directed $15 billion of government stock purchases to defend the Hong Kong dollar 10 years ago, guiding Hong Kong through the Asian financial crisis that started in 1997.

``We will support the idea if there is need because the legislative council is very concerned that an economic meltdown will affect the public,'' pro-democracy legislator Emily Lau said today in a phone interview.

No Confidence


Bank of East Asia Ltd. suffered a brief run on its deposits last month after messages spread by mobile phone questioned its finances. While depositor withdrawals ended after BEA and the government said the bank's finances are sound, the incident underscored how the financial crisis has undermined confidence in the global banking system.

Shares of BEA have dropped 28 percent since the rumors started on Sept. 22, compared with a 25 percent plunge by the Hang Seng Index.

Hundreds of Hong Kong investors protested in streets outside the city's parliament and banks this week, demanding compensation for investment losses linked to the Lehman Bothers collapse. More than 500 investors joined a public rally yesterday to express anger at having been misled by banks, the Straits Times reported.

Coordinated Effort

Asian central banks are studying ways to coordinate an effort to tackle the financial crisis that threatens to erode growth and confidence in the region, Diwa Guinigundo, deputy governor of the Philippine central bank, said yesterday.

The MSCI Asia Pacific Index fell 17.8 percent this week even as central banks in China, Australia, South Korea, Taiwan and Hong Kong joined a global effort to cut interest rates after the yearlong credit-market seizure.

Indonesia halted stock trading for two days this week, while a plunge in Thailand's SET Index triggered that nation's first 30-minute trading halt in almost two years.

South Korean Finance Minister Kang Man Soo is meeting counterparts from Japan and Australia in Washington this weekend to discuss boosting regional cooperation to the financial crisis from spreading to Asia.

``It's a matter of faith,'' Mak said. ``Hong Kong's financial system hasn't had serious problems so far.''

To contact the reporter on this story: Wendy Leung in Hong Kong at wleung12@bloomberg.net