Hong Kong and global liquidity flowsTighter liquidity in Hong Kong on higher risk-free rate.

The HKMA’s aggregate balance remained stable atHK$164b this week (ended 7 July 2013) while Hong Kong’smonetary base rose slightly by HK$0.4b over the past weekto reach HK$1,232b. The 10-year bond yield rose to 2.42%this week from 2.18% a week ago, indicating liquidity hascontracted while Hong Kong’s forex reserve in Junedeclined US$1.8b to reach US$303.5b.

Slower fund outflows from emerging markets this week.

EPFR’s weekly report showed fund outflows from China’sequity market continued, moving from a net outflow ofUS1.2b last week to a US$66m net outflow this week. Thenet fund outflow to Hong Kong fell to US$13m this week(ended 3 July) from a net outflow of US$340m the weekbefore.

Encouraging labor market data raises expectations ofslower QE. The US non-farm payroll figure was muchstronger than expected, with 195,000 new jobs created inJune, much better than the 165,000 new jobs the marketexpected. The Bureau of Labour Statistics has revised itsjobs data for the previous two months. It is now more likelythat QE will slow in September. Liquidity in emergingmarkets may contract further as a result.

China liquidity indicatorsThe renminbi spot exchange rate against the US dollar fellto 6.125 this week (ended 5 July) from 6.136 a week ago.

Implied renminbi depreciation increased from 2.4% to 2.7%in the same period. We expect the renminbi to depreciateslightly against the US dollar in 2H13F and remain in the6.10-6.20 range.

By 5 July, 7-day SHIBOR fell to 3.8% (from 5.6% a weekago), suggesting interbank liquidity has easedsignificantly. On 5 July, China's State Council issuedguidance that it would promote "financial support foreconomic restructuring, transformation and upgrading". Theguidance also mentioned that greater controls would be puton wealth management products. In our view, the focus ofmonetary policy in 2H13F has shifted to mitigating financialrisk. Curbs placed on shadow banking will exert pressureon bank balance sheets, which means the liquidityenvironment overall will be tighter than it was in 1H13.

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