The Government has ploughed up to US$5 billion into the futures and equity markets this month, further depleting its reserves and raising the medium-term risks to the currency board, according to Prudential-Bache Securities. The continued intervention would accelerate the erosion of hard-currency holdings, already under pressure because of the rise of the fiscal deficit and withdrawal of long-term equity investors, analyst Pan Ming said. In a worst-case scenario, the SAR's reserves would plummet to US$20 billion by the end of next year from last month's reported figure of about $90 billion, 'severely testing the US dollar-Hong Kong dollar link and public and investor confidence', Mr Pan said. Most brokers and analysts said there had been little or no government activity in the markets since a showdown with speculators last month sent cash-market turnover to a record HK$79 billion. Hong Kong Monetary Authority (HKMA) officials said yesterday there had been no official market activities, pointing to Financial Secretary Donald Tsang Yam-kuen's September 17 statement. Mr Tsang said then that: 'The Government has not gone into the market since August 28.' Mr Pan disagreed, saying: 'There is one obvious indication [of continued HKMA activity this month]. It is the difference between the September and October futures - the gap has been around 300 points. Obviously, there is manipulation in the market.' The September contract expired yesterday at 7,908 points, while the October contract ended yesterday at 7,680 points. At the end of last month, the Government's funds were seen selling the September contract, driving it to a steep discount to the August contract to raise the costs to investors rolling positions forward. 'Our rough estimate puts government spending on equities after August 28 at US$3 billion to US$5 billion, although there are no published figures,' Mr Pan said. 'This [expenditure] will speed up the depletion of foreign reserves, which in turn will hasten the demise of the linked-exchange rate.' Prudential-Bache said that during the coming 12 to 18 months, SAR reserves could lose US$20 billion as international investors continued to desert the equity market and another US$30 billion to offset a rise in the fiscal deficit. 'Foreign investors account for 40 per cent of Hong Kong's free float, which was [recently around US$100 billion]. In the next 12 months, Hong Kong's foreign reserves could come down by another US$20 billion if half of those funds pull out of the local market, which is highly likely if the Government continues to intervene.' A further US$15 billion could be lost during the same period to offset a deficit on the trade and services account, it said. Mr Pan said: 'In a small and open economy such as Hong Kong, the level of foreign reserves is the key to maintaining the exchange-rate target. With the Hong Kong dollar, in my view, grossly over-valued due to its fixed exchange to the US dollar, this level of foreign reserves takes on even greater significance.' Brokers said once forward commitments made by the HKMA at the end of last month were taken into account, reserves were down to US$87.6 billion.