Monday 8 June 2009
“Hot Money” at the Gates of China’s Market
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.
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“Hot Money” at the Gates of China’s Market
CSC staff, Shanghai
8 June 2009
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.
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
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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’ confidence has not fully recovered. Many see the current market activity as pure speculation.,
Hot money has not just pushing up Hong Kong’s stock market. Housing prices have also increased by 10%. The number of of houses on the market rebounded in May, up 38% from March and 2% from the same period last year. Data released on Tuesday shows that in May there was a 28.9% increase in sales over last May and a 17.2% increase over April. This all points to signs of a jump in Hong Kong’s real estate market. A recent Credit Suisse report pointed out that the current price rise in the Hong Kong real estate market may not be sustainable, as it is out of line with the GDP growth.
The large influx of hot money into Hong Kong is based on an optimistic view of the mainland economy. The latest survey from Barclays Capital shows investors are very optimistic about the prospects for economic growth in Asia. 57.5% of the respondents believe that in the next three months capital flows in the Asian emerging economies will exceed those of Latin America and Eastern Europe.
Due to the diffiulties surrounding the investment of capital into mainland China, hot money has been showered on the Hong Kong market, where world capital markets and large listed mainland enterprises converge. This is seen in the performance of large cap stocks: Chinese stocks, H shares, still play a leading role where, against the backdrop of continually rising A shares, H shares outperform and the index stocks of state-owned enterprises are also soaring. The loose monetary policy of some countries such as the United States encourages the trend, creating ideal conditions for the flow of hot money.
The pressure of hot money is causing Hong Kong some financial challenges. Joseph Yam said the continuous inflow of overseas funds will promote inflation and a bubble in Hong Kong’s asset price, which may distort the marekt for highly liquid financial assets and bring negative consequences to the stability of the financial system.
Under the influence of hot money, the Hang Seng is likely to go above 20,000 point. However, uncertainty over the flow of hot money is causing alarm among some observers. Once flows abate, Hong Kong stocks may face a serious downturn.
During May, the HKMA intervened in the market 9 times to inject liquidity to the market. Since January this year, the HKMA has invested more than HKD worthy of $22 billion to keep the HKD within specified trading ranges versus the US.
Even ordinary commercial banks are feeling the pressure from the onslaught of hot money. On May 21, in a move intended to drive hot money out of the banking system, HSBC announced that it would reduce the HKD savings deposit rate from 0.01% to 0.001%.
Some analysts estimate that more than $500 billion worth of hot money has poured into Hong Kong during the past year. Some doubt the glut of hot money in Hong Kong is connected to the appreciation of RMB.
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