Hong Kong stocks hit a 16-month high yesterday on speculation more hot money would flow into the equity market after the United States announced further quantitative easing.
In the latest sign of escalated capital inflows, the Hong Kong Monetary Authority stepped into the currency market for the seventh time this week, selling HK$3.1 billion as the local currency hit the strong side of its trading band. The de facto central bank has injected a total of US$12.03 billion since October 20.
Norman Chan Tak-lam, chief executive of the HKMA, said it was still capable of injecting more funds to maintain the peg against the US dollar. Speaking on a visit to Beijing, he also warned investors to prepare early for the potential withdrawal of funds from the markets as the US was expected to wind down its quantitative easing in 2015.
The benchmark Hang Seng Index gained 160.4 points, or 0.71 per cent, to finish at 22,605.98, the highest level since August last year. Turnover rose to a one-week high of HK$72.3 billion.
The US Federal Reserve announced its fourth round of quantitative easing on Wednesday, expanding its bond-buying programme to US$85 billion a month. Shares got a further boost when HSBC's preliminary December manufacturing purchasing managers' index came in at a 14-month high of 50.9. from the onshore market.
On top of that, the Shanghai Composite Index had its sharpest one-day gain in three years, jumping 4.3 per cent yesterday.
Liquidity in the mainland markets will benefit from revised regulations posted yesterday on the State Administration of Foreign Exchange's website: sovereign wealth funds, central banks and monetary authorities can now exceed the US$1 billion limit that still applies to other qualified foreign institutional investors.
Chan Ka-keung, Hong Kong's Secretary for Financial Services and the Treasury, said the probability of hot money flows into the city's property market was low, especially after the government rolled out a buyers' stamp duty in October that should dent demand from offshore investors.
Market experts are widely expecting capital inflows to focus on more liquid assets for higher returns, such as equities.
"Rising liquidity is no doubt helpful, and I see this trend continuing in the short term, as there are still some quality cyclical shares to attract them to the Hong Kong market," Baring Asset fund manager Khiem Do said.
Hot money would continue to be allocated to banks, insurers and raw materials firms that had been undervalued in the first three-quarters of the year rather than to local blue chips, he said.
Financials were yesterday's biggest gainer. China Life rose 2.3 per cent to close at HK$24.05 and Ping An gained 3.5 per cent to HK$62.95. China Longyuan Power lost 5.4 per cent to finish at HK$5.23 following a share placement plan.
Ryan Tsai, senior investment strategist for Greater China at Coutts, said: "Fund inflows to the Asian market will accelerate in the coming six to 12 months, reversing what was seen last year."
With a potential cyclical recovery on the mainland, Hong Kong equities would be among the best assets to be in, Tsai said.
A total of US$43.3 billion has entered Asia-Pacific markets (excluding the mainland and Malaysia) this year as of December 1, UBS data shows. That is a sharp turnaround from a net capital outflow of US$14.4 billion from the region last year.