Christmas hasn't been this good in Hong Kong since 1993. Back then a mainland-concept investing boom and flood of hot foreign money ensured records were broken during the holiday period. The Hang Seng Index had practically doubled in the preceding six months culminating in an enormous December rally. The New Year, so it seemed, offered more of the same. Instead, a treacherous January was followed on February 4 by US Federal Reserve chairman Alan Greenspan's pre-emptive strike against inflation, which ensured the US economic expansion stayed on course. In Hong Kong, however, the rate rise triggered an equity bear market. As today, there was much talk of disengagement from the US economic cycle, with booming Asia, and the mainland especially, offering a new engine of growth. This was of course nonsense (it's the currency board, stupid) and it took 34 months for the HSI to re-test those highs and a painful recession was endured to boot. Past experience is no guide to the future but the boundless optimism of this festive season, underpinned by an alluring but unquantifiable new economic frontier, has one obvious spoiler. Your broker may claim technology is replacing property as the new big thing in Hong Kong but a sustained rise in local interest rates without a severe stock market correction is a novel idea. Even during past giddy booms, the SAR's vulnerability to the interest-rate cycle was well understood. On Monday, this newspaper published the year-ahead forecasts of leading brokerages operating in Hong kong. Almost none saw prices declining. Hardly any mentioned rising interest rates as a threat to property and banking stocks which still account for more than 50 per cent of the market's worth. This would seem a little odd when you consider the circumstances of the last three months' explosive price rises. Preparation for Y2K has seen central banks flooding the markets with liquidity. This follows a year of vast expansion in money creation following the near-death experience of the global financial system in October last year. That was fine so long as the US remained the only big economy experiencing strong growth and essentially bankrupt Asian firms chased revenue by dumping goods at below-cost prices, allowing an inflation-free expansion to continue. Now, however, Europe is recovering, Asia is humming and commodity prices, led by oil, are rising. This inevitably means rising inflation which central banks, led by Britain, are strongly signalling means higher interest rates. This does not ignore good arguments that in the longer term an era of structural deflation beckons, just that the business cycle is still alive and kicking. The spanner in the works is all the credit central banks have washed into financial systems. The present expansion of US narrow money is at its highest since the early 1950s. Yet a hypnotic belief in the power of new technology and apparent market celebration that Y2K computer worries don't matter even before the date has passed, has meant almost no focus on the money-supply and interest-rate issues. Hong Kong has been a huge beneficiary of this hot money. The traditional virtuous circle of capital inflow, low interest rates and rising consumer demand has been complemented by a fabulous investing theme to pump up stocks. Of course it doesn't matter that most property firms will never be broadband Internet players. That Pacific Century CyberWorks is a $160 billion company with a few loss-making venture-capital investments or that China Telecom is valued as if it was Vodafone rather than a government arm. What matters is that external economic conditions are again favourable to Hong Kong asset inflation. Whether they stay that way after US rates rise, money markets tighten and risk appetite falls is a different matter.