The "hot money" did not recede even during the Christmas holidays, when investors across the world normally pull back to prepare for the next year.
 
Instead, between Christmas and New Year, hot money drove the benchmark Hang Seng index (HSI) to climb above the psychological barrier of 20,000 points.

December 28 saw the HSI reach an all-time high of 20,001.91, reflecting a year-on-year rise of more than 34 percent.
H-shares did an even better job in 2006. They surged 94 percent to peak at 10,455 on December 28.

"Hong Kong has never been short of liquidity after the yuan rose in the second half of 2005," says Tung Tai Securities' Tung Sing-hing.

Twelve Hong Kong economists surveyed by China Daily went even a step further. If the yuan appreciates again in 2007, it could push up the HSI to maybe 21,700 points (the average of their separate forecasts).

Higher inflation not likely

Allaying fears that a stronger yuan would accelerate inflation in the Chinese mainland's neighbouring markets, the economists say that Hong Kong residents' daily expenses would not increase much because of a possible rise in the prices of imported products.

As a service-based economy with little agriculture or manufacturing units, Hong Kong imports many essential goods, including eggs, vegetables, meat and fish, from the Chinese mainland, hence the fear that a stronger yuan would make things costlier.

But compared to the spiralling housing costs that account for 30 percent of the consumer price index (CPI) in one of the world's most expensive cities, the rise in prices of essentials and daily use products could at most be "mild", says Tang.

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