On May 12, Hong Kong banking system's aggregate balance shot up by a record HKD20.7bn on continuous inflows forcing the Hong Kong Monetary Authority to buy US dollar and sell Hong Kong dollar. After settlement, the aggregate balance surged to a record high of HKD246.1bn. Taking into account the sterilizations executed by the HKMA in the past six months, inflows into Hong Kong's banking system amount to HKD300bn or 5% of the total deposits, which is a sign of resurging global excess liquidity. Albeit beneficial, the implications and impacts of such inflows are complicated.

Global easing is beginning to bear fruits

The Lehman Brothers collapse and the ensuing financial tsunami plunged the world into severe credit crunch. Global economic activities and financial markets came to a standstill between end 2008 and early 2009. In order to break the vicious cycle of credit crunch and economic recession, global central banks resorted to coordinated easing.

In the United States, after cutting the Fed Fund Target Rate to zero in last December, the Federal Reserve turned to quantitative easing, buying even US treasuries. As a result, the size of the Federal Reserve's balance sheet shot up to USD2081.3bn on May 6 from USD1190.5bn a year ago. The excess reserves held by the US deposit taking institutions surged from USD2.0bn to USD777.5bn. The monetary base was up by a whopping 112.3% from a year ago in April, and M2 up by 8.5% in the same period.

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