Evidences of Monetary Forces Gaining Upper Hand in Hong Kong

In our previous post, Monetary Forces Appear To Be Gaining An Upper Hand, we argued that the tsunami of monetary programs applied by global governments have been distorting financial markets relative to the real economy. This has prompted for glaring disconnections which has caused quite a confusion between the bears and the bulls looking for justification for their causes.

We find further proof of these phenomenon evolving in Hong Kong.

We excerpt an article from the Wall Street Journal, (bold emphasis mine)

``A wave of money flooding into Hong Kong from mainland China and the rest of the world has propelled property and stock prices even as the economy falters.

chart from tradingeconomics.com

``Hong Kong's government predicts the economy will shrink up to 6.5% this year and unemployment is at a three-year high. Yet home prices are up about 13% this year, while the benchmark Hang Seng Index has gained 18% in the same period.

chart from stockcharts.com

``The strong inflows of capital from abroad have kept Hong Kong's de facto central bank busy. Since January, it has pumped more than US$22 billion of Hong Kong dollars into the market to keep the pegged currency within its mandated trading band against the U.S. dollar. The result is a wave of liquidity washing into asset prices.

``Hong Kong's real-estate market may be one of the more pronounced beneficiaries of a global effort by governments to print money and stimulate lending. Quantitative easings by central banks in the U.S., Europe and Asia have created "booming capital flows" that are "swamping" some markets, Sean Darby, a Hong Kong-based strategist for Nomura International, wrote in a recent report.

From Wall Street Journal

``Hong Kong's situation, however, is unusual. In other places, a net inflow of foreign funds can lead to both a rise in asset prices and a rise in the value of the local currency. But thanks to Hong Kong's link to the dollar, only the asset prices can rise -- and because the currency can't, the gains are more pronounced.

``The peg also makes Hong Kong attractive to investors during a period of currency instability. And Hong Kong's stock market is one of the most accessible and liquid places for foreign money to bet on a recovery in mainland China, where currency controls make direct investment trickier.

``Andrew Fung, head of investment and insurance for Hang Seng Bank in Hong Kong, believes that, with Western markets still sputtering, Hong Kong investment dollars that have long flowed overseas may now be coming back home.

``Anecdotal evidence also suggests some of the money is coming from mainland China, where Beijing's efforts to hurriedly channel four trillion yuan ($586 billion) in stimulus measures into the domestic economy have energized bank lending and unleashed a flood of liquidity."

So there you have it; quantitative easing, China's stimulus program and repatriated capital driving the Hong Kong Financial Markets where inflationary programs have indeed been buoying the marketplace.

Welcome to the new bubble.