Forget George Soros, Hong Kong monetary officials' biggest nightmare has always been capital flight from the territory. Persuading Mrs Chan not to liquidate her time deposits, sell the flat and dump the proceeds in Vancouver property has been their greatest challenge. Huge financial reserves and a powerful armoury of monetary defences mean international speculators can be faced down with pure muscle. No such sanction can be applied to residents who are free to invest as they please. Ever since the nadir of the Tiananmen Square massacre, the territory's moneyed class has provided for its financial security through off-shore nest eggs and foreign bolt holes. The doomsday scenario said that trend would increase causing an ultimate crisis for the fixed currency exchange system. After all, in a city where switching funds off-shore can be done over the telephone why risk financial ruin by keeping your savings in Hong Kong dollars? Clearly the answer is opportunity and swelling confidence in Hong Kong's financial future. While public opinion swings with the political vicissitudes of the day a telling barometer of confidence lies in the monetary statistics released every month. Those show residents more than ever holding Hong Kong dollar assets with no intention of investing their savings off-shore. A survey by the Chinese University and Credit Lyonnais Securities Asia simply confirms the message from financial markets. Buoyant economic conditions, a rising property market and plans for increased consumer spending mean residents hold more of their net-worth locally than at any time in the past decade. It is easy to forget just how different things were back in mid-1990. For one, capital flight meant that only 40 per cent of M2 money in circulation was local currency, compared with more than 60 per cent today. This is all good news for Joseph Yam Chi-kwong and his Hong Kong Monetary Authority team dedicated to defending the currency peg. With foreign exchange reserves approaching US$70 billion and a mandate to push interest rates as high as it takes, the territory is well set to deal with a purely speculative currency attack. Indeed, so long as local residents are buying the unit a Thai-style panic seems a distant possibility. Despite public concern over deteriorating civil liberties and personal freedom, the incoming Special Administrative Region government is deemed one that will at least make the trains run on time. Confidence in its ability to manage the economy is apparently high. So long as that remains, the risk premium to hold Hong Kong dollars will inevitably diminish. Last week's credit upgrade of China and Hong Kong by Standard and Poor's was explicit recognition that the financial future of both are intimately connected. The bond market has been saying the same thing. A year ago seven-year Hong Kong exchange fund bills traded at a 40 basis point premium to a comparable Chinese sovereign issue. Today the exchange fund bond commands a 10 basis point discount to the mainland paper. Such moves demonstrate the international 'confidence play' in Hong Kong that has dramatically reduced the yield difference between Hong Kong and US securities. Today, bonds issued by both governments pay almost the same return for maturities stretching four years into the future. This year has seen an astonishing turnaround in sentiment. Hope is a powerful emotion, while the tempering impact of experience has not yet been encountered. Free markets allow the tensions of such an upheaval to be fully expressed, while conspiracy theories of mainland cash supporting the bond and currency markets simply do not wash. And yet, amid this wave of euphoria forget not the inherently short term contract between Hong Kong and its citizens. Any indication of financial instability is sure to see Mrs Chan darting for her foreign currency account before the shift is ever registered in opinion polls.