HongKong Business

Officials again deny hot money inflows

By Joy Li (HK Edition)
Updated: 2010-12-07 07:24
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Chief Executive says reports of HK$10t stash are 'groundless'

Senior officials in Hong Kong have again lashed out at suggestions that around HK$10 trillion in "hot money" is being hoarded in the city in preparation for a speculative assault on mainland asset markets.

The reports are "absolutely groundless", said Chief Executive Donald Tsang at the Economic Summit 2011 Monday.

He said capital inflows into Hong Kong have mainly been targeted at numerous initial public offerings (IPO) in the city, most of which have been conducted by mainland companies.

When these companies repatriate their newly-raised capital to the mainland for their operations, they make them through official channels, Tsang said. In this way, fund transfers across the border are transparent and causes no harm to the mainland market.

As a free economy, Hong Kong cannot just shut the door to capital movements but should further develop the city's financing platform, absorbing capital through various channels such as IPOs, Tsang emphasized.

The chief executive also argued that conversion of the yuan in the city under the cross-border yuan trade settlement scheme were purely for trade settlement purposes rather than speculation.

"In the process of developing its yuan businesses, Hong Kong should contribute positively to the nation's financial reforms," Tsang said. "And the premise is to help safeguard national financial security, which we care about more than anything else."

Tsang's rebuttal echoed the statements that Chan Ka-keung, secretary for financial services and the treasury, wrote on his blog Sunday. According to Chan, assets currently managed by Hong Kong-based hedge funds amounts to only HK$500 billion, allocated in local and regional stock markets and subject to strict regulatory requirements. Meanwhile, mainland regulators keep tight restrictions on its capital account, leaving little chance for hot money to flow in and speculate. Furthermore, Chan pointed out, it's a fact that global hedge funds currently manage $2 trillion - or HK$16 trillion - worth of assets. The suggestion that Hong Kong sits on 62 percent of global hedge fund assets "doesn't hold water," commented Chan.

The strong words used by the two Hong Kong government officials followed a recent CCTV (China Central Television) report, which quoted a Bank of China analyst's forecast that around HK$10 trillion hot money will flood into the city by year end, with the ultimate target of making quick profits by speculating on the mainland asset market.

Chong Tai-leung, an economics professor at the Chinese University of Hong Kong, said Monday that the HK$10 trillion figure may have been exaggerated. But he nevertheless warned of risk, citing the fact that George Soros, the financier who stormed Asia's financial markets in 1997, has set up an office in Hong Kong and would not be doing so for nothing .

Chong said that hot money can sneak into the mainland through channels such as illegal private banks or fake trade transactions.

Charles Li, chief executive of the local bourse operator Hong Kong Exchanges and Clearing Limited (HKEx), meanwhile called for "confidence and patience" in response to worries that concerns about hot money may deter the pace of yuan internationalization, a process in which Hong Kong serves as the testing ground. As the world's second largest economy, Li said that the mainland is very capable of handling the situation.

"Yuan internationalization is an irreversible trend. The key here is to well discipline the gate of capital flows," said Li.

On the road map to yuan internationalization, yuan IPOs are also being earnestly awaited by the market. Li said HKEx is still working on details but offered no schedule for yuan IPOs. As of October 2010, yuan deposit in Hong Kong reached 217.1 billion, up 45.4 percent from September, according to figures released by the Hong Kong Monetary Authority. Li added that with a pool of such size, yuan IPOs are immediately workable but may fail the test of sustainability. HKEx is working on a scheme which will ensure that yuan IPOs are not conditional to yuan liquidity, said Li.

China Daily

(HK Edition 12/07/2010 page2)