Hongkongers like their foreign-currency investment products. They like their Australian dollar fixed deposits, their local currency Asian bond funds and their Singapore dollar real estate investment trusts.
The investment story is basic. Interest rates are higher in markets such as Australia, Indonesia, Malaysia and India, compared with Hong Kong (see right sidebar). A three-year Malaysian government bond in ringgits yields three per cent, compared with 0.22 per cent for a Hong Kong government bond in the local currency, for example.
People can also make money on the currency appreciation. If people have the view that a given currency is on the rise, they might hope for the double boost of extra yield and gains on the foreign exchange.
This has been an attractive story in recent years. In the aftermath of the 2008-09 credit crisis, Asian economies stood as global pillars of growth, and regional currencies rose in value against the so-called G3 currencies (the yen, euro and US dollar). The trend is unwinding with the US dollar showing strength this year, but an investor who bought many of the popular regional yield currencies in 2009 would be sitting on gains today (see chart).
Interest rates and yields are high in many of the regional markets, certainly compared with Hong Kong's next-to-zero deposit rates. So what's stopping investors from piling into, for example, Australian government bonds?
The short answer is currency risk. Foreign exchange rates can be volatile, which spells risk for the investor who, when it's over, wants to convert the investment back into Hong Kong dollars.