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 last week.
"We'll use all the ammunition if we have to," Julia Leung, undersecretary 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 (US$180 billion) of foreign currency reserves, the network cited Chief Secretary Henry Tang as saying. The benchmark Hang Seng Index has plummeted 29 percent since September as the financial crisis has bitten down hard.
"The US ended up suffering a domino effect when the government didn't rescue Lehman Brothers," Billy Mak, a finance professor at Hong Kong Baptist University, told Bloomberg News on Sunday. "Hong Kong needs to stabilize its financial market by any means or (it will) 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 US$15 billion of government stock purchases to defend the Hong Kong dollar 10 years ago, guiding Hong Kong through the 1997 Asian financial crisis.
"We will support the idea if there is need because the legislative council is very concerned that an economic meltdown will affect the public," said legislator Emily Lau.
Bank of East Asia 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 September 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 last week, demanding compensation for investment losses linked to the Lehman Bothers' collapse.
More than 500 investors joined a public rally on Sunday to express anger at having been misled by banks, according to the report by the Straits Times.
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