The 1997 rally has been one of the more widely sold stories on the Hong Kong market this year, but UBS Securities regional strategist Ajay Singh Kapur does not believe it is going to happen. To support his contrarian view, Mr Kapur presented to clients yesterday an argument based on economic fundamentals and liquidity factors, setting himself apart from the crowd of analysts that focus on political factors. Forecasts for a 1997 rally rest on a common belief that Beijing will pump money into the territory to ensure a successful handover. Mr Kapur argued that there was unlikely to be any rush of liquidity from China. 'There are also hopes that the renminbi will depreciate 10 per cent or so, inflation will rise and capital will come flowing to Hong Kong - a mini-repeat of 1993. These expectations are unlikely to be met,' he said. Monetary easing in China should be enough to fuel domestic markets, but there was no fundamental reason that Chinese investors would prefer Hong Kong, he said. 'For the Hong Kong stock market to benefit from escaping PRC liquidity, base money/M2 growth will have to rise substantially from currently depressed levels.' Base money is currency in circulation plus bank reserves. Money supply measured by M2 has leapt over the past year, because of China's high bank-deposit rates, holding down the base money/M2 ratio. For Chinese investors to move their money offshore, domestic inflation would have to accelerate substantially, and the preconditions for that were not there, Mr Kapur said. 'In other words, if you are not expecting 15-20 per cent inflation in China, do not expect any meaningful flows of capital from China into the Hong Kong equity market.' UBS as a house has forecast that the Hang Seng Index will hit 9,900 by the end of the year, with a 10 per cent recovery forecast for next year.