Hong Kong braces for the return of hot money in search of yield, as near-zero rates resurrect the era of cheap funds

An estimated US$130 billion of capital flooded Hong Kong between 2008 and 2015, HKMA’s data showed

This time around, hot money may find its way into mainland China markets instead, analysts say

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The Hang Seng Index soared by 10 per cent on October 30, 2008, after the US Federal Reserve‘s interest rate cuts. The index would soar 52 per cent the following year. Photo: EPA

Published: 8:00am, 19 Mar 2020Updated: 11:01pm, 19 Mar 2020

Hong Kong’s monetary authority, which spent two decades amassing one of the world’s largest foreign exchange holdings, is bracing for the return of hot money after the US Federal Reserve executed an unprecedented one-two punch of rate cuts to fight the coronavirus pandemic.

An estimated US$130 billion of funds flooded Hong Kong between the global financial crisis in December 2008 and the end of the US Fed’s quantitative easing (QE) seven years later, as rate cuts meant to salvage a US economy fuelled asset prices half a world away.

The Hong Kong Monetary Authority (HKMA) has to run its monetary policy in lockstep with the US central bank to maintain the local currency’s three-decade peg against the US dollar.

Now, with a 61-basis point gap between Hong Kong and US central bank lending rates after Sunday’s latest emergency cut, the stage is set for a repeat of 2008, the start of a decade-long era of cheap financing that would eventually create the world’s most expensive property market as the flood of liquidity soaked up every tradeable asset from flats to offices, shops and stocks.

“We will see strong capital inflow into Hong Kong in the coming years,” said Raymond Chan, chief investment officer of Asia-Pacific equity at the German fund management company Allianz Global Investors. “Zero interest rates and more QE [quantitative easing] in the US will see money flowing into riskier asset classes over time as the hunt remains for yield and returns.”

Armed with a US$446.1 billion war chest through the Exchange Fund, the HKMA’s chief executive Eddie Yue Wai-man said the de facto central bank is ready for battle, if necessary. The authority, responsible for maintaining the local currency’s peg, would buy or sell US dollars in the market to keep the Hong Kong dollar within a trading band.