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THE current spectacular surge in Asian stock markets is being driven by vast sums of hot money flowing into the region in search of growth, analysts say.
Another key factor that has unleashed this deluge of liquidity is China's recent loosening of restrictions on the outflow of funds for direct foreign investments.
The result of this heady mix: Investors are partying like it is the rampaging bull market of late 2007.
Back then, regional stock markets sped to record highs, following a proposal by China to allow a so-called 'through train' scheme to allow its mainland citizens to buy stocks directly in Hong Kong.
Analysts see distinct parallels between then and now - including the risk of a rapid asset bubble.
The expected beneficiaries of the latest flood of liquidity would include blue chips which mainland investors have no access to, and giant mainland firms listed in Hong Kong.
This would explain sharp gains yesterday posted by DBS Group Holdings, up 72 cents to $13.72, and United Overseas Bank, up 54 cents to $17.38, as well as a 12 cent rise to $4.06 by property giant CapitaLand which has extensive China exposure.
In a report last week, Morgan Stanley said the surge in regional stocks was similar to a sharp rebound sparked by the 'through train' scheme - after the August stock market crash two years ago.
The scheme failed to materialise owing to concerns over its possible impact on mainland bourses, but it still triggered massive buying of blue-chips in Hong Kong and other regional markets.
Between late August and October in 2007, Hong Kong's Hang Seng Index shot up 52 per cent to hit a record high of 31,638.2 points, while the benchmark Straits Times Index (STI) here gained 25 per cent to an all-time high of 3,831.19.
'Although not completely the same, similar conditions are now developing in 2009,' said Morgan Stanley.
In recent months, flows of hot money into China have accelerated. As a result, China's foreign reserves surged to a record high of US$2.13trillion (S$3trillion) in June, even though it had only enjoyed a smallish second quarter trade surplus of US$34.8 billion.
Apart from hot money, massive lending by mainland banks is creating abundant liquidity, causing the Shanghai stock market to surge by 88.8per cent this year.
In the first half of this year, mainland banks rushed to extend 7.37 trillion yuan (S$1.5 trillion) in fresh loans. It sparked fears that fresh asset bubbles in China might be forming, as the money was diverted to stocks and property.
To cope with such a surge of liquidity, Morgan Stanley said China may 'simply be allowing more hot money outflow indirectly into the Hong Kong stock market'.
As fund managers regularly spread purchases across the region, Singapore and other regional bourses may have benefited.
In the past three weeks, the STI has risen by 15.5 per cent, as it moved in tandem with a 15.4 per cent gain by Hang Seng.
But Morgan Stanley says 'the movie seen in 2007 might replay'.
The Hong Kong stock market could be 'squeezed up' by mainland retail and institutional players arriving in a rather short timeframe and global investors trying to join up with them.
'Valuations could be over-stretched again,' it said.
The underlying sources of the latest surge of hot money might not be as sustainable as the liquidity-drenched rally in late 2007 when China's huge trade surplus was the catalyst.
'If Chinese money should rush into Hong Kong to substantially re-rate the stock market, we recommend that investors sell into the last hurrah,' it said.
After hitting a record high of 31,638 in October2007, the Hang Seng then fell about two-thirds in value over the next 12 months, as a credit crisis rocked the global financial system. The STI roughly halved over the same period.
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