Don't get burnt on hot money flowing into Hong Kong, investors warned

Don't get burnt, say officials as billions flowing in ahead of cross-border stock scheme could leave due to poor outlook and US rate rise

PUBLISHED : Tuesday, 12 August, 2014, 11:51pm
UPDATED : Wednesday, 13 August, 2014, 7:33am

The government has increased its monitoring of capital flows as finance officials and brokers warn that billions in "hot money" flowing into the city to bet on the stock market could leave just as quickly due to a poor economic outlook and fears of a US interest rate rise.

"The government will keep a close eye on the risks of fund flows in and out of the city," Secretary for Financial Services and the Treasury Chan Ka-keung said yesterday.

The Hong Kong Monetary Authority has repeatedly intervened in the currency market since the beginning of last month to sell almost HK$70 billion as the influx of funds boosted the Hong Kong dollar to the upper end of its trading band. Under the peg to the US dollar, the HKMA is obliged to intervene to keep the Hong Kong dollar trading at between 7.75 and 7.85 to the US currency.

Many stockbrokers said the influx was due to the October launch of a scheme that would allow investors to conduct cross-border trading of stocks in Hong Kong and Shanghai. Others say funds are also coming from Russia due to the unrest in Ukraine.

In July, the benchmark Hang Seng Index rose 6.8 per cent while the H-share index gained 7.7 per cent. Monthly turnover increased 39 per cent from June.

Chan warned investors that the money could leave just as easily due to the gloomy economic outlook.

"The Hong Kong economy has turned out to be worse than the government initially expected. Recent trade and export data showed a slower demand from overseas markets in recent months. This is because the US and many other overseas markets have recorded lower than expected economic growth."

Yesterday was the third consecutive day that senior finance officials warned about possible economic instability. Financial Secretary John Tsang Chun-wah said on Sunday the government would lower its forecast of 3 to 4 per cent GDP growth for Hong Kong this year, after a disappointing second quarter.

HKMA chief executive Norman Chan Tak-lam yesterday repeated his Monday warning on capital outflows.

"US interest rates may rise as a result of the US government starting to wind down monetary policy. This may cause the Hong Kong interest rate to rise as a result and that would hurt the property market," he said, adding the uncertain outlook meant the HKMA could not relax mortgage tightening measures.

Chris Cheung Wah-fung, legislator for financial services, said: "Clearly there is hot money flowing in to bet on the stock market ahead of the [cross-border trading] scheme. Investors should be careful as the hot money may leave as many of these foreign investors are eyeing quick profits only."

Ben Kwong Man-bun, a director of KGI Asia, also warned investors. "The macroeconomic outlook in Hong Kong is not looking good. The recent stock market rally may not last long. Local investors should not blindly follow the hot money and rush into the market or they may have their fingers burned."