Southbound Funds Flood into Hong Kong Stocks, Disrupting HKD’s Tight Liquidity Balance

[Financial News Express / Liu Minfu] Foreign reports suggest that the influx of southbound funds is complicating HKD carry trades, as the delicate liquidity balance becomes increasingly vulnerable to disruption. The massive inflow of southbound capital into Hong Kong equities has created fresh demand for the Hong Kong dollar (HKD), which could emerge as a key force in curbing carry trades and bolstering the HKD’s strength after its exchange rate moved away from the weak-side convertibility guarantee.

The gradual withdrawal of liquidity by the Hong Kong Monetary Authority (HKMA) over the past two months is now showing tangible effects, pushing the HKD liquidity environment into a fragile equilibrium where marginal disruptions are becoming more pronounced. Last Friday, net southbound purchases hit a record HKD 35.9 billion, driving the HKD to appreciate by up to 0.27% intraday. By Monday, the overnight HKD Hibor rate surged to nearly 2%.

FX traders also reported a slowdown in HKD financing activities, signaling unfavorable conditions for low-interest, low-volatility carry trades. If southbound inflows persist, these HKD short positions could face rapid unwinding.