Hot money inflow loses momentum

PUBLISHED : Friday, 21 May, 2010, 12:00am
UPDATED : Friday, 21 May, 2010, 12:00am

The flood of hot money into Hong Kong dried up in the first quarter but there was no cause for concern, said monetary chief Norman Chan Tak-lam yesterday.

The head of the Hong Kong Monetary Authority said there had been HK$640 billion of inflows in the 15 months to the end of last year as investors chased numerous new listings in the city, the world's largest market for initial public offerings last year.

But there were no inflows in the first quarter, Chan told legislators at the monthly financial affairs panel meeting. But he added that there was no sign that money had been leaving the city either.

'People are happy when hot money flows in, but they worry when it flows out,' he said.

'Even if there was a hot money outflow, it means the market would just return to normal. This is good for Hong Kong as hot money inflows keep interest rates low and force up asset prices.'

Chan said the downturn in the stock market and the stronger US dollar had stopped the hot money flowing in. 'This trend may be turned around if the IPOs become active again,' he said.

However, this is unlikely to happen as many companies are postponing their IPOs and other fund-raising plans in the current market climate.

The poor market sentiment in the first quarter also hurt the performance of the Exchange Fund, the reserve that backs the Hong Kong dollar and which the HKMA invests in bonds, stocks and local and foreign currencies.

The fund reported an investment income of HK$10.8 billion in the first quarter, up slightly on the HK$10 billion of the previous quarter. This compared with a loss of HK$33.5 billion in the first quarter last year when the market was still in the throes of the financial crisis.

However, the first-quarter result was lower than the strong investment return of HK$71.9 billion in the third quarter last year and HK$58.5 billion in the second quarter last year. During the first three months, the fund lost HK$3.1 billion in Hong Kong stocks and HK$8.7 billion in foreign-currency investment, which was offset by HK$11.4 billion of earnings from bonds and HK$11.2 billion from overseas stocks.

Independent legislator Regina Ip Lau Suk-yee criticised the loss. 'There are many retail investors who have earned more from the stock market than the Exchange Fund. The HKMA should explain its poor investment decision and if any of its staff were responsible for the poor investment,' Ip said.

Chan said the Exchange Fund was not purely for investment but was to maintain the stability of the financial market so its performance should not be directly linked with other privately run funds. 'We should take a longer-term view for the Exchange Fund's investments and should not be too concerned about the short-term volatility,' Chan said.

He warned of a bumpy road ahead due to problems such as the European debt crisis.