Hot money inflow expected to continue, analysts say

An influx of hot money into Hong Kong chasing the rising yuan has forced the city's financial chiefs to exchange HK$32.24 billion worth of local currency for US dollars in the past two weeks as they try to stop the Hong Kong dollar from spilling over its official limit of HK$7.75 against the greenback.

Ten times this past fortnight, the Hong Kong Monetary Authority has intervened to weaken the local currency. The last time it took such action was in 2009, and many analysts believe the main reason this time round is the same - quantitative easing by the US, a controversial policy designed to put money back into its own economy.

But this time, analysts expect a longer lasting inflow of hot money - so named for its speculative nature which means it tends to come in quickly and leave just as quickly.

For Hong Kong, protecting the peg is not an option. It was introduced in 1983 to ensure a fixed exchange rate against the US dollar, which means the HKMA must buy or sell in the market to keep the local unit trading within a range of HK$7.75 to HK$7.85 against the US dollar.

The monetary authority's last intervention came as HK$640 billion of capital poured into the city between October 2008 and the end of 2009. The influx came in the wake of the US Federal Reserve's first round of quantitative easing measures and was widely attributed to this controversial monetary policy.

Then, the Fed spent about US$1.7 trillion of newly created cash buying bonds back from US banks. By "printing money", it kept interest rates low to help homeowners and cash-strapped businesses, while the spare cash at the banks was intended to stimulate the economy.

But it also meant investment banks and financial firms ended up with more cash to invest in healthier overseas markets with higher rates of interest, such as Hong Kong.