And they were taking it personally.”On 7 August, a week before the government started intervening in the market, Mr Yam alleged that Hong Kong was facing a “severe conspiracy” by speculators trying to break the Hong Kong-dollar peg. “They were getting more and more worried,” said a senior-level insider. Mr Yam asked the watchdog Securities and Futures Commission (SFC) to provide him with evidence of market manipulation, and was not pleased to be told that such evidence did not exist “A bunker mentality started to grow,” said the source “They could not accept a confluence of events was under way. Speculators were also going short in individual stocks, and going short on the Hong Kong dollar.Across the road Sir Donald was looking at the same flow of information. If they actually succeeded in forcing a devaluation of the currency, their bets on its fall would produce profits running into the billions.From his office in a gleaming tower facing the Bank of China building, Mr Yam studied a small avalanche of reports about the build-up of short futures markets contracts in the Hang Seng index – positions taken by speculators who believed the market would fall.

According to Joseph Yam, the chief executive of the Hong Kong Monetary Authority (HKMA), the speculators would have netted some pounds 300m for every 1,000 point fall they could engineer in the Hang Seng index. If they succeeded in breaking the link, they stood to make billions of dollars. The hedge funds and big investment houses were circling for the kill. Many influential market players were confidently forecasting that Hong Kong would have to abandon its currency’s fixed link to the US dollar, which had helped see it through a number of crises in the past two decades. “There was almost hysteria around the trading rooms of Hong Kong.”By the middle of August that hysteria was coming to boiling point.

“The fear factor was horrendous,” recalled Peter Churchouse, the managing director of Morgan Stanley Dean Witter in Hong Kong. The authorities were receiving reports, allegedly, that a number of smaller banks and broking houses were teetering on the brink of collapse. Share prices were going through the floor; property prices, which underpin share prices, were in freefall; speculative activity was pushing up interest rates to near unbearable levels. However, after a two-month investigation by The Independent on Sunday, the real story can be told.The blunt fact is that the people who run Hong Kong’s financial affairs panicked, and once they had finished panicking they managed to persuade some of the most important global market players that they had pulled off a brilliant coup.There were good reasons to panic. After a frenzy of market intervention in which it spent some pounds 9.6bn, what was supposedly the world’s most laissez faire government became the world’s biggest state shareholder.

The speculators were seen off but at a cost yet to be paid.How and why it happened has, until now, been a closely guarded secret. As the Hong Kong government’s finance chiefs saw it, they were facing a horde of voracious foreign fund managers trying to make billions by forcing the devaluation of the Hong Kong dollar, while they had the task of defending the tiny former colony from marauders. Sir Donald Tsang, Hong Kong’s diminutive bowtie-wearing financial secretary, even spoke the language of Clint Eastwood films “I’m going to hurt them,” he warned. “I’m going to hit them where it hurts and tell them don’t come here and make a lot of money.”
On 28 August last year Sir Donald peered through his thick glasses and saw the big-league speculators make his day.