HKD$71.5 Billion Flows Into Hong Kong in One Month

Political and economic turmoil in China sparks capital flight into the stock market
May 6, 2015 Updated: May 7, 2015

HONG KONG—Funds worth HKD $71.5 billion (US $9.2 billion) flowed into Hong Kong in April, said Hong Kong Monetary Authority (HKMA) chief Norman Chan Tak-Lam in a Legislative Council meeting on May 4.

The announcement followed an earlier warning that an inflow of hot money could lead to greater fluctuations in the stock market. Chan said the inflow was a result of the buoyancy of the stock market, corporate increase in demand for Hong Kong dollars to pay dividends, and a rise in mergers and acquisitions.

The Hong Kong SAR Government, the HKMA, and the banking sector are closely monitoring the inflow of hot money into the territory.

While the injection of money into the economy is comparable to the period following the announcement of the start of the “through-train” operation of the Hong Kong stock market last August, its frequency has definitely increased. Nevertheless, it has yet to reach the level of HKD $640 billion that was reached in 2008 and 2009 after quantitative easing in the United States.

Chan claimed that since 2008, over US $110 billion (HKD $900 billion) has moved into Hong Kong. He described the situation as very unusual and said he expected an outflow, albeit at a smaller scale, when U.S. interest rates began to normalize.

With the upcoming implementation of the Hong Kong-Shenzhen stock connect, following a similar arrangement between Hong Kong and Shanghai some time ago, Chan said there would be greater interdependency between the Hong Kong and mainland Chinese markets. He advised investors to gain a better understanding of the new arrangements and make necessary adjustments.

“The ups and downs of the local market would be greater, so investors would need to take extra caution and manage their risks properly,” Chan said.

Source of Funds Unknown

Hong Kong Monetary Authority chief Norman Chan Tak-Lam on Feb. 27, 2015. (Epoch Times)
Hong Kong Monetary Authority chief Norman Chan Tak-Lam on Feb. 27, 2015. (Epoch Times)

According to Chan, it is very hard to determine the source of such funds.

“The recent inflow amounts to $70 billion. Funds move in and out of the territory. However, we have no reliable statistics on either their source or their destination; all we know is that the inflow exceeds the outflow,” he said.

He emphasized that the HKMA was responsible for the stability of the financial sector and would act within its capacity to maintain the sector’s smooth operations in the face of any disturbances, including political ones.

Chan admitted that the capital inflow could be related to the stock market. As the mainland Chinese stock market skyrocketed, a large amount of funds flowed into the local market, capturing the attention of mass media overseas.

Bloomberg revealed that HKD $20.5 billion (US $2.6 billion) was invested in the Hang Seng H-Share Index Fund in April, making it the highest monthly inflow since 2010 and the third highest historical monthly inflow into any exchange traded funds (ETFs) globally.

In the past four months, HKD $29 billion (US $3.7 billion) has been invested in ETFs in Hong Kong. The duration of the inflow was the longest since 2013 and at a massive scale not seen for many years. Investors are betting on a continued uptrend of the stock market.

Many analysts believe that most of the funds come from mainland China, as they are mostly invested in mainland-related stocks with relatively poor performance and lower market capitalization. The trading pattern closely resembles those of individual mainland investors.

Bank of Communication chief strategist Hong Hao, who is extremely bullish about the market, is of the opinion that at least 70 to 80 percent of the funds came from China, including the “Shanghai-Hong Kong stock connect, QDII, and publicly raised funds.”

Hong said the actual amount that flowed into the stock market could be well above the $70 billion mentioned by Chan, since the HKMA has no means to regulate underground banking, which could well be a major source of funds.

Senior analyst Lam Yat-ming expects continual capital inflow into the territory. However, he said that the market was undergoing some consolidation as the Hang Seng Index had already gone up by about 3,000 to 4,000 points, so investors should think twice before putting their money into the market.

Fund Transfer Made Easy

The transfer of funds between Hong Kong and mainland China is facilitated by Hong Kong’s many foreign exchange shops. At present, there are many channels for funds to be transferred underground.

Apart from traditional foreign exchange centers, funds can be shifted overseas in the form of trade and investment. By making use of offshore casinos and overseas bank cards, people can acquire foreign currencies abroad while circumventing controls from the Foreign Exchange Control Commission.

A fund manager told Epoch Times that underground banks have many ways to move funds into Hong Kong.

The most common way is for people to deposit their money in the mainland and then be granted a loan of the same amount in Hong Kong, in order to earn the interest differential.

He said many banks are involved, including HSBC and Hang Seng Bank, and so are fund houses. Similar arrangements can be made between businesspeople in the two places at a commission of 1.5 percent.

“The amount involved has to exceed tens of millions of dollars. It is not uncommon at all for it to reach a few billion. To be honest, it is just money laundering,” he said.

Translated by Stanley Ng. Written in English by Sally Appert.

Views expressed in this article are the opinions of the author and do not necessarily reflect the views of The Epoch Times.