Hooray! After a dismal first quarter of the year, the Hong Kong stock market finally broke into positive territory yesterday. True, the gain is nothing much to write home about. At yesterday's close just short of 21,929, the benchmark index was up by just 0.13 per cent over the year year-to-date (please see the first chart below). That's far short of the bombastic forecasts of many analysts, who late last year were predicting bumper first-quarter returns of 10 per cent or more for Hong Kong-listed stocks. But the return to positive territory is still good news. The 12 per cent rebound from February's low marks a substantial warming of sentiment towards the market as the fears that haunted investors through much of the first quarter have receded. They haven't disappeared entirely, of course. Investors still fret about bubbles in the mainland's property market, and the impact any government counter-measures will have on developers and the banking system. But with mainland inflation rates still fairly modest, and officials insisting it is too early to unwind last year's stimulus measures, any drastic policy tightening looks unlikely. And while administrative steps to cool the property market are on the cards, investors can comfort themselves with the knowledge that the authorities will be anxious not to let too much air out of the bubble in case it deflates entirely, which would threaten the pace of economic growth - and company earnings. Meanwhile, the two other big fears which were troubling investors a couple of months ago have been almost entirely forgotten. As the economic recovery has gained traction there is no longer any talk of a double-dip recession. Yes, recovery in the United States will be a long and arduous process. And yes, Europe's periphery has big debt problems. But Asia seems to have shrugged off the developed world's troubles with remarkable ease. Yesterday the World Bank forecast that East Asia's developing economies will grow by 8.7 per cent this year. At the same time fears that the flood tide of liquidity that lifted the Hong Kong stock market last year could reverse, dragging equity prices down with it, have also ebbed. Those inflows may have abated since December, allowing the Hong Kong dollar to retreat a touch from the strong side of its permitted trading band. But so far, there is no sign that the HK$640 billion which poured into the city's financial system between October 2008 and late last year has begun to leak out again. It's true that funds in the Hong Kong Monetary Authority's aggregate balance - a useful measure of surplus liquidity in the local banking system - have fallen from their all-time high of HK$320 billion in November to just short of HK$187 billion last week. But the decline is entirely due to stepped-up issues of exchange fund bills and notes by the monetary authority rather than to outflows. As the second chart below shows, Hong Kong's monetary base - the overall amount of liquidity in the system - has continued to inch higher. All that extra money won't stay here for ever. At some point mainland companies will begin to repatriate the HK$260 billion of offering proceeds they have on deposit in Hong Kong's banks. And if the mainland's growth prospects sour, international investors will pull out much of the money they pumped into the market last year. But neither prospect looks imminent. And although investor sentiment will wobble when the US Federal Reserve signals it is preparing to end its zero interest rate policy, even the first US rate rises are unlikely to trigger a severe outflow. For large amounts of money to flow out of the system, the differential between Hong Kong's market-determined Hibor short-term interest rate and the equivalent US dollar Libor rate would have to be sufficiently big to attract the attention of arbitrageurs. But according to analysts at Credit Suisse, the arbs are unlikely to get out of bed for a differential of less than one full percentage point. With the spread at a meagre 0.16 of a percentage point currently, that implies the Fed will have to make at least four quarter-point rate rises before arbitrage trade becomes attractive enough to trigger big outflows from Hong Kong. Given the shaky state of the US economy, few economists believe the Fed is likely to raise rates so high before next year, at the earliest. As a result, investors hopes are high that local stocks will remain buoyant for the rest of 2010, despite their lacklustre start to the year.