The latest round of US monetary easing has put Hong Kong's de facto central bank on high alert over the outlook for inflation as the prospect of more speculative money finds its way into the city's economy.
The Hong Kong Monetary Authority warned investors about potential rising investment risks amid what it called an "abnormal" economic environment.
As widely expected, the US Federal Reserve on Wednesday announced at the conclusion of its final policy meeting for the year that it would conduct more outright asset purchases, increasing the amount of money it will pump into the US economy each month to US$85 billion from the US$40 billion announced in September.
"The expanded US quantitative easing policy would cause more capital inflows into emerging markets, including Hong Kong," said HKMA chief executive Norman Chan Tak-lam, who was on an annual visit to Beijing with a delegation of the Hong Kong Association of Banks. "We will see bigger challenges in inflation and the asset market.
"Investors should be more cautious amid the 'abnormal economic conditions' and rising uncertainties."
Chan said the authority would intervene in the money markets if capital inflows into the Hong Kong dollar continued. "The HKMA has the ability to buy an unlimited amount of US dollars to maintain currency stability."
The authority stepped into the currency market again on Wednesday, selling HK$11.664 billion as the local currency repeatedly hit the strong end of its trading range.
As hot money continues to flow in, UBS expects the Hang Seng Index to rise at least 10 per cent next year. The index is up 22 per cent so far this year.
Before the Fed announcement, Hong Kong stocks rose on Wednesday to a 16-month high. But the glow wore off yesterday as the index retreated 0.26 per cent to finish at 22,445.58 points.
"The excitement from the quantitative easing is becoming less and less as we don't see a meaningful pickup in the US economy," said Henderson Global Investors fund manager Caroline Maurer.
In Shanghai, the Composite Index closed 1 per cent lower. However, the yuan strengthened 0.3 per cent, to 6.2329 against the US dollar.
The Fed also said interest rates would stay low "at least as long" as US unemployment remained above 6.5 per cent and if inflation was no more than 2.5 per cent.
As for Hong Kong's property market, analysts said the government's cooling measures would have a bigger impact than the so-called hot money flows.
David Ng Ka-chun, the head of China and Hong Kong property research at Macquarie Capital Securities, said "the mortgage rate is already at a low level. Even if it drops further, the buyers can't overcome the impact" of the buyer's stamp duty of 15 per cent that was imposed on non-permanent residents and corporate buyers. It had cut demand substantially.