Hong Kong version of Open Market Operation

Sep 16th, 2009 - HK government injected money into the capital market 2 times. What is that, and why is that??

Basically, the problem originated from the U.S. Recent economic reforms to put out the so-called worst financial crisis of the century (comparable to 1929's World wide depression) have made the U.S. government's debt load heavier than ever. Government budget had already become huge deficit before President Obama's take over of the oval office, and it kept expanding at a fast pace after the take over - government intervention to save the financial market which they used 800 Billion, and now, the potential health care reform which would take a sizable amount of US GDP to fix the problem. All these liabilities made the U.S. dollar weak and forced it to drop to the lowest point in the last twelve months of time.

Hong Kong dollar is pegged to the U.S. dollar since 1984. Assets like real estate and stock/ equities in Hong Kong at this moment look relatively cheap in the eyes of foreign currency holders (e.g. non-USD or HKD holders). In the last few days, HK stock market rallied partly due to this "hot money" rush in.

Remember that investor needs to convert its AUD, GBP, EU, etc., into HKD first before he/she can buy any HK assets. Demand for HKD increases, and without adjusting the supply, interest rate and exchange rate will be altered drastically. In order to "balance" the exchange rate, or the pegged rate, between HKD and USD, Hong Kong Monetary Authority (HKMA) has to conduct a series of operation, which is similar to the one used in the U.S. called, Open Market Operation. This time, is for HK government to buy USD, or USD based bond/ notes from the 3 major HK banks (those HKD money printing banks) and to inject HKD to the capital market. This act is a basic supply meets demand act - in order to maintain the stability of exchange rate as well as interest rate, supply of HKD has to be increased if demand of HKD is increased in first place.

Futher info can be found here (in Chinese though): http://www.info.gov.hk/hkma/chi/public/hkmalin/06.pdf

USD probably will continue its low level/ low value in the near term future, 6 months to 9 months? The reality is that the "value" for all these HK assets are not actually coming from the intrinsic side of the equation, but from relative valuation, and not to mention without any concrete economic recovery evidence to be seen. This creates a hollow situation. If condition continues to exist, this "bubble" one day will be bursted.

Please do show some respect, if we actually considered this as financial tsunami. 22k points now for Hang Seng Index, do you still want to bet on it?