HONG Kong and other regional markets could suffer if the surge of American investment funds into Asia dries up as US interest rates rise, according to Morgan Stanley's Barton Biggs. The analyst, whose views of China set Hong Kong off on a bull run in September, sent a shudder through the markets yesterday when he announced that he was reducing the weighting of the local market in his Emerging Markets model portfolio. After putting the recommended proportion of Hong Kong shares up from 11 per cent to 16 per cent in September, Mr Biggs has now cut the suggested weighting back to 10 per cent. The shift sparked off an overnight slump in Hong Kong prices quoted in London, and sent the Hang Seng index tumbling. It closed down 171.55 points at 9,335.43 yesterday, after sliding to 9,165.95 at one point. The advice to sell off Hong Kong stocks shocked investors and rival brokers, who saw it as a major reversal of direction by Morgan Stanley, although Mr Biggs emphasised that he was sticking with the same portfolio of stocks that he recommended in January,but reducing the overall exposure to the market. Mr Biggs is also recommending slightly reducing holdings in Indonesia, Malaysia and Thailand, which have also surged in recent weeks. Apart from domestic concerns, Mr Biggs warns that the flood of memory from America which has been driving up prices cannot be relied upon. A recovery in the US would mean that interest rates there would start to rise, so reducing the relative attraction of Asian stock markets, he said. 'The US economy is doing better, and interest rates are rising. The liquidity pump may be beginning to sputter,' he said in a circular to clients.