Sharpening the Blade Against the Red Wall: From Hong Kong to Handong

In the early morning of August 13, 1998, the screen in the analysis room of the Hong Kong Liaison Department was filled with densely packed futures contract data. Li Jianguo, rubbing his bloodshot eyes, pointed to the candlestick chart of the Hang Seng Index December futures contract, his voice tinged with exhaustion: "Director Zhou, the short sellers have completely shifted to the derivatives market! The December contract price has fallen to 11500 points, while the spot index is at 12000 points, a difference of 500 points. They are using leverage to amplify their short-selling power!"

Zhou Jin pressed his fingertips against his temples; the intense combat of the past few days had left his eyes bloodshot, but his gaze remained sharp as an eagle's. On the screen, trading volume in the futures market was exploding; Quantum Fund's affiliated accounts were continuously selling forward contracts, using leverage to put pressure on the Hong Kong financial market—every point of index decline would cause losses several times over through the amplification effect of derivatives, its destructive power far exceeding that of the spot market.

"This is a typical 'spot market dumping + futures arbitrage' strategy," Zhou Jin said in a deep voice. "They first sell blue-chip stocks in the spot market to lower the index, and then profit from the price difference through futures contracts. The leverage ratio may be as high as 10 times or more. If we only guard the spot market, we will always be on the defensive." He immediately dialed an encrypted video call. When Shen Mingyuan's figure appeared on the screen, his eyes were also tinged with the blues of staying up all night.

"Professor Shen, the short sellers have fully shifted their focus to the derivatives market. The spread between December contracts has reached 500 points. If we don't intervene soon, our previous efforts to support the market may be in vain." Zhou Jin spoke rapidly but logically. "My suggestion is to 'fight fire with fire': First, concentrate funds to buy Hang Seng Index December futures contracts to hedge against the short sellers, while simultaneously raising the spot index to compress their arbitrage opportunities; second, use foreign exchange forward contracts to lock in the Hong Kong dollar exchange rate to avoid the dilution of capital efficiency due to exchange rate fluctuations; third, collaborate with mainland financial institutions to short the US tech stocks held by Soros' Quantum Fund in overseas futures markets, attacking their weaknesses and forcing them to come back to support the market."

Shen Mingyuan stared at the futures data on the screen, pondered for a moment, and decisively made a decision: "Approved! The State Council has coordinated with three large financial institutions in the mainland to allocate 600 billion yuan specifically for the derivatives battle, and you will have full command. Remember, the derivatives market is ever-changing; you must act decisively, but also leave room for maneuver, and avoid getting caught up in excessive speculation."

"Understood!" Zhou Jin hung up the phone and immediately issued instructions: "Li Jianguo, liaise with the Hong Kong Monetary Authority and the mainland social security fund. Today, use 30 billion yuan to buy Hang Seng Index December futures contracts in batches, keeping the price between 11500 and 11600, with each transaction spaced 15 minutes apart to avoid alerting short sellers; at the same time, notify Huayao Capital to simultaneously increase its long positions in futures to form a combined force."

He turned to the encrypted phone and instructed Lin Yue: "Immediately arrange a foreign exchange forward contract transaction to lock in the HKD/USD exchange rate of 7.73 for a period of 3 months; in addition, in conjunction with mainland institutions, short the three US tech stocks heavily held by Quantum Fund on the Nasdaq market, using 20 billion yuan to build positions in batches to create pressure on their holdings."

This battle of derivatives was more perilous than the battle to defend the Hong Kong dollar and the stock market. Short sellers' leveraged operations amplified market volatility exponentially; the December contract price fluctuated by as much as 300 points in a single day, torn between bulls and bears. Zhou Jin slept only four hours a day, curled up on a cot in the analysis room, getting up every hour to check market dynamics; the ashtray was piled high with cigarette butts.

On August 15th, short sellers suddenly intensified their selling pressure in futures markets, causing the December contract price to fall below 11400 points, widening the price spread to 600 points. Li Jianguo urgently said, "Director Zhou, should we increase our positions to fight back? If it falls any further, our long positions will face losses!"

Zhou Jin stared at the short sellers' trading data and suddenly sneered, "This is a short trap. Look, their forward contract positions are nearing their limit, and their cash flow is about to collapse." He judged that the short sellers were making a desperate gamble, trying to force the longs to close their positions, and immediately ordered, "Not only do not increase your positions, but reduce your futures long positions by 10%, and at the same time, push up HSBC Holdings and Hong Kong Telecom in the spot market, pushing the spot index to 12200 points."

This reverse move instantly disrupted the short sellers' rhythm. The rise in the spot index further widened the futures price spread, and the short sellers' leveraged positions could no longer withstand greater volatility, forcing them to buy some contracts to close their positions. The December contract price quickly rebounded to 11700 points. Li Jianguo suddenly realized, "So they were bluffing!" Zhou Jin nodded, "The derivatives market is not just about capital, but also about psychology and rhythm. They wanted to force us to make mistakes, but we deliberately disrupted their rhythm."

Meanwhile, Huayao Capital's bargain-hunting operation was also progressing simultaneously. Lin Yue reported via encrypted channel: "President Zhou, we have successfully acquired a 10% stake in Hong Kong Union Bank for 5 million yuan and an 8% stake in Huaxin Securities for 3 million yuan. Although these two institutions are not large in scale, their branches cover the entire Hong Kong market, which can improve our financial layout and can cooperate with our subsequent market stabilization efforts." Zhou Jin replied: "Very good. Have the team complete the equity transfer as soon as possible, and at the same time, send finance and risk control personnel to ensure the stable operation of the institutions."

On August 18th, a crucial turning point occurred. Zhou Jin's monitoring revealed that the US-listed tech stocks held by Quantum Fund had fallen by 15% due to short selling by mainland institutions, putting their overseas accounts under pressure to meet margin calls. He immediately deduced: "Short sellers are about to be forced to liquidate their derivative contracts to support the overseas market!" He immediately ordered: "Concentrate the remaining 30 billion yuan to aggressively buy Hang Seng Index December futures contracts at the 11800-point level, while simultaneously joining forces with local consortia to boost the spot index, targeting 12500 points!"

A flood of funds poured into the market, causing the spot index to soar and futures contract prices to surge in tandem, rapidly narrowing the price spread to 200 points. Short sellers faced the risk of forced liquidation of their leveraged positions, forcing them to frantically buy contracts to stop their losses, creating a "short squeeze." The December contract price rose 500 points in a single day, closing at 12300 points, essentially in sync with the spot index, completely erasing the arbitrage opportunities for short sellers.

Over the next two days, short sellers suffered a series of defeats. Quantum Fund, facing losses from declining US tech stocks and Hong Kong derivatives contracts, experienced a funding chain disruption and was forced to liquidate most of its Hang Seng Index futures contracts. Monitoring data shows that short sellers' total losses in the derivatives market are estimated at $50 billion, and several hedge funds announced their withdrawal from the Hong Kong market.

At the close of trading on August 20th, the Hang Seng Index spot price settled at 12800 points, while the December futures contract price remained stable at 12750 points, narrowing the spread to 50 points. The turmoil in the derivatives market had temporarily subsided. In the liaison department's analysis room, team members slumped in their chairs, their faces showing exhaustion but unable to hide their excitement. Li Jianguo handed over a report, his voice hoarse but booming: "Director Zhou, we won! The valuation of the bank and securities company equities that Huayao Capital bought at the bottom has increased by 20%, and combined with the gains from the futures contracts, the unrealized profit exceeds 800 million yuan; your personal account has a combined profit of 15 million yuan from futures hedging and stock appreciation!"

Zhou Jin took the report, his fingertips trembling slightly. Eight consecutive days of intense competition, less than four hours of sleep each night, and countless accurate predictions had finally brought about this crucial victory. He walked to the window, gazing at Hong Kong in the morning light, and the Qingtian stone seal in his pocket seemed to shed its heavy burden.

Just then, the encrypted phone rang. Shen Mingyuan's voice was full of praise: "Xiao Jin, the derivatives battle was a resounding success! The State Council highly recognizes your command abilities. But be wary, although the short sellers suffered heavy losses, they have not completely withdrawn. They may target the real estate market or the real economy in the future. Huayao Capital needs to quickly integrate its financial layout to prepare for the final battle."

"Understood," Zhou Jin replied in a deep voice.

After hanging up the phone, he opened Chen Panpan's notebook and wrote on the latest page: "Victory on the derivatives battlefield; the strategy of adhering to principles while employing unconventional tactics has finally paid off. There are still thorns ahead, but our original aspirations remain unchanged, and victory is in sight." Sunlight streamed through the window onto the paper, making the handwriting clear and resolute. He knew that the final battle of this financial war was approaching, and he and Huayao Capital were fully prepared.