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Hong Kong Monetary Authority (HKMA)

Hot money inflow may rock markets, warns HKMA's Norman Chan

Investors warned of 'highly abnormal' climate and urged to exercise caution in case of swing

PUBLISHED : Tuesday, 11 December, 2012, 12:00am
UPDATED : Tuesday, 11 December, 2012, 2:55am

Hong Kong Monetary Authority chief executive Norman Chan Tak-lam has warned of volatile investment markets ahead, due to hot money flowing into the city.

The city's central bank has already bought US$7 billion by selling the same amount of Hong Kong dollars since mid-October, Chan said on the sidelines of an economic forum.

The authority's move was aimed at weakening the local currency.

While worldwide monetary easing measures have sought to boost consumer and economic activities, they have also meant banks have more money to bet on stock and property markets in Hong Kong. Chan said this kind of hot money inflow would continue, but he believed the scale would be smaller than the last inflow from October 2008 to the end of 2009, when a total of HK$640 billion poured in.

The Hong Kong dollar is pegged to the US dollar and must trade within a range of HK$7.75 and HK$7.85 to the greenback. The HKMA sells the Hong Kong dollar when the exchange rate appreciates to the upper limit of HK$7.75 and buys the local unit to support it when it dips to the lower limit.

Chan, however, also warned of a potential strong outflow once global markets turned around.

"The current situation is something we have never experienced before. Since the outlook for the macroeconomic and financial environment is very uncertain, it is highly possible we will continue to see large fund inflows and outflows as well as sharp fluctuations in the financial markets," Chan said.

"Therefore, I would like to ask everyone to stay alert to the risks ahead and be aware the current environment is highly abnormal and uncertain. We should all take precautionary measures and … avoid overstretching ourselves. Otherwise, we may find ourselves being trapped in the debt abyss with no way out."

Chan worries the hot money would lead to a sharp rise in asset prices and high inflation pressure. "Since such increases are not supported by economic fundamentals, any increase in wealth will be seen as transient. As a result, households are unwilling to increase spending and, in the end, the real economy fails to rebound," he said.