World Crisis Online

By CSC staff, Shanghai A surge in market liquidity from large security offerings in the United States combined with a more optimistic view of China’s economic recovery and currency, the RMB, has resulted in a flood of “hot money” into Hong Kong, the gateway to investment in mainland China.  “Hot money” is the Chinese term for capital awaiting investment in a project.

At the moment, Hong Kong’s stock market (“HKSE”) is the popular choice of the world’s investors.  In May, the Hang Seng, the HKSE’s blue chip tracking index, increased by 2651 points (17%), the best performance for that month since 1977.   This is equivalent to a two trillion HKD increase in value, or one million HKD for each of the exchanges two million shareholders.

Back In Shenzhen, adjacent to Hong Kong, is the main channel of inflow and outflow for investment into mainland China.  Investors and speculators believe, the region’s housing prices and stock market have increased lately due to the influx of hot money.

At the moment, the HKSE is completely awash in foreign capital. Hot money inflows began to accelerate after March this year, and reached extremely high levels by mid-May.  The effect was strking – the Hang Seng Index rose from 13,000 to 19,000 the same three-month period.

All of this is because Hong Kong is an outpost of the mainland economy. Joseph Yam, Chief Executive of the Hong Kong Monetary Authority (HKMA), stated that Hong Kong has become a haven for hot money when he spoke to the Legislative Council Financial Affairs Panel on May 21.  “A relatively sound monetary system and access to the mainland economy are making Hong Kong a refuge for foreign capital.  Since the outbreak of the international financial crisis in September last year, foreign capital has continued to flow into Hong Kong.”

Deposits held by the banking system in Hong Kong recently reached 256.967 billion HKD, the highest point in Hong Kong’s history

The latest research report from Citibank also pointed out that in the past six weeks the average weekly inflow of funds into Asia, especially Hong Kong, has reached the peak levels last seen during the bull market of 2007.  Further evidence of the liquidity boom can be seen in the Hong Kong Inter-bank Offered Rate (HIBOR), which now stands at 0.05%, the lowest level since November 2004. Hong Kong’s hot money flows in from around the world.  These cash assets are largely controlled by hedge funds and investment banks, who have played a significant role in pushing up the market.   Medium and small scale investors, who account for about 30% of the market, have played little role in the run-up and appear to be far less bullish.

In fact, most ordinary people in Hong Kong are still very worried about the inflow of hot money and are cautious about investment.  In the long term, fundamentals of the mainland economy are still seen as questionable and investors