Cash tide turns as central banks ratchet up interest rates

Global financial markets are on the cusp of a major change in conditions. And although it may take a while to have a big impact on Hong Kong, it is inevitable the effect will be felt sooner or later.

Put simply, the glut of cheap money that the world's economy has enjoyed for the past few years is beginning to subside.

Since June 2004, the United States Federal Reserve has raised interest rates 14 times in succession, jacking its benchmark short-term rate up from just 1 per cent to 4.5 per cent today.

At first, the effect on Hong Kong was muted. Rates remained low in absolute terms and bullish investors lifted stock and property prices from the lows plumbed during the Sars outbreak of 2003.

But, more recently, the tightening has begun to be felt. Local interest rates have more than doubled over the last 12 months, driving property prices lower since last summer. And, although the stock market began this year strongly on hopes US rates may soon peak, interest-rate-sensitive bank and property shares have struggled to regain levels reached last year.

Still, liquidity conditions remain favourable. For now, there appears to be no end to the flood of hedge-fund and mutual-fund money chasing investment opportunities.

Emerging Portfolio Fund Research reported record flows of US$1.5 billion into Asian (excluding Japan) equity funds in the first week of this month, and a further US$304 million into dedicated China equity funds. Much of that money has come to Hong Kong, where the surplus liquidity has kept local-currency interest rates at a discount to US-dollar rates.