Post hoc, ergo propter hoc - Latin for 'after this, therefore because of this'. The phrase describes the fallacious assumption that because one thing follows another, the one thing was caused by the other. It is also an apt criticism of the current general wisdom surrounding Hong Kong's money market, which holds that a possible upward revaluation of the yuan is having a significant impact on local capital inflows. In the pre-electronic age, the 'follow the money' approach was persuasive advice. If you needed to unravel a messy tangle of events to get to the truth, search for the carpet bag full of cash and you would have your man. There indeed was your capital, on the move and openly betraying its presence and motive. Case closed. The principle of following the money trail to the truth remains sound today. But sadly for investigators, the bag man has been replaced by invisible keyboard operators and straight-through processing, and the spoor has become a great deal more difficult to track. Impossible, perhaps. Events on financial markets in Hong Kong over the past fortnight illustrate the challenge this presents to those in search of the truth. Researchers and analysts at investment banks have reported - and newspapers, including the South China Morning Post, have repeated - that speculators are pumping new inflows of so-called hot money into Hong Kong dollar deposits in hopes of windfall gains prompted by a likely yuan revaluation. But there are a few problems with this post hoc, ergo propter hoc account of events. Firstly, not one shred of real-time direct data is available on capital inflows - publicly, at least - to support the claim. Instead, the statement depends for its plausibility on reasoning backwards from such indirect data as does exist: short-term interest rates are falling, the argument runs, and therefore hot money must be flowing in. Another problem with the story is that no compelling argument has been made as to why the Hong Kong dollar should automatically follow the yuan higher in the event the mainland authorities bend to pressure and revalue their currency. Ask for one and you shall not receive. Yet another problem with the current version of events is that there has been comparatively modest upward pressure on the spot and forward rates for the Hong Kong dollar - well within typical trading ranges; and the aggregate balance has remained steady at about $3.8 billion. In the final quarter of last year, and early in the new year, when capital was indubitably flowing into Hong Kong as investors cashed up for a plethora of initial public offerings and bond issues, the aggregate balance ballooned to above $50 billion and the currency spot rate strengthened to 7.70 (compared to its present level of 7.79). Finally, if the story is to be believed, there is a puzzle presented by the arithmetic underlying the bet. Overnight Hong Kong dollars were yesterday earning interest of 1.33 per cent, compared with a US dollar rate of 2.95 per cent; the one-month Hong Kong interbank offered rate (Hibor) was 1.56 per cent against a US dollar rate of 3.09 per cent; and two-month Hibor was 1.64 per cent, versus a comparable US dollar rate of 3.14 per cent. Yet cash managers, if the 'hot money' story is sound, are busily creating Hong Kong dollar accounts to secure a possible currency gain of just 1.1 per cent or so - if forward contracts have got it right - forgoing the superior returns available from holding US dollars. It doesn't seem to add up, does it? The absence of real-time data on cross-border currency flows is another puzzle. Disruptive short-term speculative capital flows were identified as a major cause of the 1997-98 Asian financial crisis and most of the remedies proposed in the post-mortems that followed focused on the urgent need for regulators to monitor such flows and share the results with one another.