North-to-South Flow

“As well as reaching its lowest level against the euro, which has been trading at more than $1.47, the dollar has also fallen to its lowest level against the Canadian dollar since 1950, sterling since 1981, and the Swiss franc since 1995,” reported Andy McSmith of The Independent.

Warren Buffet, world-renowned investment star, who last month publicly declared that the US dollar currency was not the best currency to own now, is hardly the only person who has grown averse to the dollar. Jim Rogers, commodities expert, and Brazilian super model Gisele Bundchen, were amongst the latest to join the “no US dollar please” league. At the central banks level, Chen Siwei, vice chairman of the Standing Committee of China’s National People’s Congress, hinted recently at the Central Government’s inclination to divest part of its colossal US dollar holdings, not to mention other central banks like those in Korea, Iran, Iraq, Venezuela and Russia also have similar tendencies.

With talks of more sub-prime loan and housing bad news to weigh on the U.S. economy, the swooning US dollar looks set for more southward pressure. Two months ago, in the once yawning resource backwater of the North American economy, the Canadian dollar reached parity with the greenback for the first time since November 1976. The soaring loonie reflects the strong fundamentals of the Canadian economy, which has benefited from record world crude oil prices and strong demand for metals, coal, chemicals and grain from developing countries like China and India. The province of Alberta, home to vast reserves of oil sand, can yield up to 175 billion barrels of oil, according to estimates by industry officials, ranking it second to Saudi Arabia in terms of crude oil reserves.

The strength of the Canadian dollar has prompted a steady southerly flow of gloating Canadian consumers who have been on a shopping spree in the U.S. Goods ranging from cars, to electronic gear, to jewelry, to clothes and shoes, are all on these shoppers’ lists.

“We’ve just bought a Lexus in Washington State. It’s almost 30% cheaper than in B.C.,” beamed a Vancouver resident. Such purchases and those of other consumer goods are on the rise and are a result of Canadian retailers’ reluctance to pass (or delay in passing) on foreign exchange savings to customers. American retailers have Canadians to thank for propping up their otherwise flaccid business. All thanks to a free foreign exchange flow between the two countries and a free market economy in both.

In Hong Kong, a different type of north-to-south flow is taking place. It is the illegal flow of mainlanders’ yuan savings through underground banks into Hong Kong’s stock and property markets. The mainland authorities are clamping down on such illegal fund flows, which had been waiting impatiently for the delayed “through-train” program that would have enabled mainland investors to invest legally in Hong Kong stocks.

The key concern of mainland officials about the “through-train” scheme, which was to be implemented in small steps, with Tianjin as the first test ground, is probably the fear that once the floodgates are thrown open, the outward flow of yuan will get out of control with unpredictable consequences. Another crucial question bothering officials may be how the mainland residents’ uninformed and inexperienced investment in Hong Kong stocks is going to affect the already bubbly market. These would-be (or actual) investors have never encountered market crashes in their lives and the stock market is just as well a casino in their eyes. A crash in the Hong Kong market may well puncture the mainland stock bubble as well. Officials must have had good reason to decide to hold back the scheme at the eleventh hour.

As it happens, even before the “through-train” scheme is in effect, funds have been “sneaking” out in abundance already through the illegal underground channels into Hong Kong’s stock market. These illegal funds can at least partly explain the frothy market in the last few months.

While Canadians going south to shop is a welcome act in the southern neighbors’ eyes as it helps to boost their retail trade, it is hardly certain that Hong Kongers would benefit from disorderly fund flows from north of the border. If nothing else, the gambling mentality and inadequate education of most mainlanders who want to play the Hong Kong market would be more of a destructive than constructive element to the market. Of course, in the short term, more fund inflows would mean an even higher Hang Seng Index and Hong Kong conglomerates no doubt would welcome with open arms the added liquidity, which would enable them to raise capital, whether needed or not, by issuing new shares or placing old shares.

At the end of the day, increased volatility of the market would be inevitable as fear and greed take turn to tease investors, particularly neophytes, who would ultimately be sore losers at the end of a full market cycle (i.e. the game is not finished until the market reaches its bear bottom after peaking). A casino-like market would do nothing but tarnish Hong Kong’s reputation as an international finance centre.

The way things are going though, it appears that the floodgates are already ajar despite the recent clampdown and the delaying of the “through-train” scheme. At some point in the not-too-distant future when the scheme finally gets the green light, coupled with approved QDII funds, a roller-coaster market is almost certain to unfold. The SAR government certainly had “very good reason” to buy into the shares of the sole stock exchange, which will gain, risk free, from increased transaction volumes.