HK Econ: "How to Gauge the Flow of Funds in Hong Kong: A Monetary Aggre research, important, available, major

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Key points:
◆       Flow of funds is an important factor influencing stock market movements in Hong Kong, as overseas investors have been major players in local capital markets. Nevertheless, timely official fund flow data are not available for Hong Kong. In this report, we employ a monetary aggregates approach to gauge the magnitude of net inflow of funds and suggest some early indicators for guessing the direction of fund flows.
◆       We estimate that a net inflow of funds amounting to HK$90bn was seen in September, reversing the outflows totaling HK$581bn in the previous 10 months. Under the linked exchange rate regime, change in the money stock is determined by expansion of domestic credit and net inflow of funds. Therefore, net inflow of funds can be derived by subtracting the change in HKD bank loans from the change in HKD M3. In September, HKD M3 increased by HK$94bn while HKD bank loans expanded by HK$4bn, implying a net inflow of funds amounting to HK$90bn.
◆       The inflow of funds appears to have continued in October as reflected by a continuous strengthening of the HKD and an easing of HIBORs. This is because persistent inflow of funds leads to appreciation of the HKD and an expansion of the monetary base and thus an easing of interest rates. However, short-term movements in the exchange rate and interest rates can also be brought about by trading and speculation activities in the foreign exchange and money markets. More importantly, we do not see a consistent relationship between movements in the HKD exchange rate and the Hang Seng Index.