Hong Kong Weekly Liquidity Monitor :Stable liquidity as China’s 3Q13 indicators come in line

Hong Kong and global liquidity flows

    Stable liquidity in Hong Kong’s monetary and banking system. Over the past week, the HKMA’s aggregate balance fell HK$17m and Hong Kong’s monetary base went down by HK$1.3b. Both were moderate declines. The Hong Kong dollar remained stable against the US dollar as the Hong Kong spot rate ended last week at 7.754 (18 October). Hong Kong’s 10-year treasury yield remained at 2.1% by the end of last week.

    Net fund inflows to China and Hong Kong markets. EPFR’s weekly report showed fund flows to China’s equity market turned from a net inflow of US$220m two weeks ago to a net inflow of US$710m last week. Fund flows to Hong Kong’s equity market went from a net inflow of US$66m two weeks ago to a net inflow of US$62m last week (ended 16 October). Meanwhile, funds flowed into the US equity market last week on easing concerns over the debt-ceiling.

    Higher risk appetite in global financial markets after US debt-ceiling overhang removed. The US Congress finally reached an agreement to postpone the deadline for raising the US government debt ceiling to early February 2014. With the resumption of normal operations at US government departments, the biggest overhang for the global financial market over the past several weeks is lifted. Failure to raise the debt ceiling would have caused the US to default on its debt, significantly increasing the risk-free interest rate and risk premiums in markets around the world. Over the next several weeks, we believe investors will be focused sharply on 3Q13 corporate results.

    China liquidity indicators

    SHIBORs fell on improving liquidity in inter-bank market. A total of RMB45b was drained from the market last week as no reverse repo operations were conducted. Funds flowed back into China with the rebound in 3Q13 GDP resulting in 14.2% YoY M2 growth in September. 1-week SHIBOR declined from 4.2% a week ago to 3.7% by 18 October.

    3Q13 GDP growth of 7.8% is in line, though growth momentum is weakening. We expect lower 4Q13F GDP growth of 7.5% YoY due to the high comparison base and diminishing effects of the mini-stimulus. Investors are likely to focus on China’s upcoming reform agenda and those sectors likely to benefit from reform policies to be released at the Third Plenary Session in November.