Chinese currency accumulating in the Hong Kong banking system

By Mark Konyn

Data suggest that emerging market mutual funds, including those invested in Asian markets, have received about 10 per cent of their assets in additional flows over the past four to five months. This contrasts dramatically with funds invested in developed markets, which have struggled to attract any net new flows for the entire year. The prospect of this trend maintaining momentum is influencing mutual fund investor behaviour across Asia.

First, dollar weakness may well dampen enthusiasm for fixed income funds. Since the global financial crisis, and particularly during this year, many investors have been buying US and global bond funds. At the same time, many of the region’s currencies have been appreciating relative to the US dollar. Despite attractive returns from the bond funds themselves, the prospect of greater Asian currency appreciation , and hence lower returns from the bond funds, could be a catalyst for investors to move back to Asian equities.

The prospect of more Chinese currency accumulating in the Hong Kong banking system seeking investment opportunities, and a stock market priced in renminbi, suggests a possible re-rating for Hong Kong stocks – a potential development not lost on many investors. Despite the improved flexibility allowing mutual funds in Hong Kong to be priced in renminbi, the shortage of investment opportunities so far has limited their growth. A stock market priced in renminbi will clearly create new opportunities for the industry.

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