NATIXIS Hong Kong Capital Flow Tracker: Domestic uncertainties start to bite asset prices but yet to spark large capital outflows

• Home prices started to correct further in September while the performance of the Hang Seng Index (HSI) was mixed. Risk appetite remained broadly unchanged as the ratio of short selling and the volatility of the equity market stayed stable.
• Net Outflows from foreign investors generally reduced but the Stock Connect has reverted into capital outflows. As for the southbound Stock Connect, mainland Chinese investors have increase their allocation to H-shares due to the arbitrage opportunities. However, higher outflows from Hong Kong into mainland China were recorded through the northbound Stock Connect, which was equivalent to 6.5 times of the net southbound inflows. A key reason is the higher inclusion factor of A-shares in the S&P Dow Jones and FTSE Russell's indices.
• The USDHKD strengthened slightly but with limited carry trade incentives. HIBOR continued above the LIBOR without a major change in yield differentials as the movement for both rates were limited. The option market (25D risk reversal) indicated the bet on USDHKD remained bearish.
• Although the aggregate balance showed the HKD liquidity was still stable, foreign reserves reduced due to the demand for USD to be transferred overseas. The HKMA has to address the issue by reducing USD deposits offshore and moving them back to local banks, which were also constrained by the HKMA regulatory limits on foreign currency open positions.
• For lagged data, loan growth accelerated while deposit growth fell, resulting in a slightly higher loan to deposit ratio. In particular, deposit growth decelerated to 1.8% YoY for the HKD and grew 7.6% for foreign currencies. As a result, loan to deposit ratio edged up slightly to 74.8% for all currencies and 90.1% for the HKD, showing the liquidity for the HKD was increasingly tight and there was limited room for further lending in the HKD.
• Bank’s USD net aggregate position improved and become more balanced in June 2019. However, further net capital outflows could easily drag the net position again when investors become more risk adverse.

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