Gavekal:Trillion-dollar deposits drive the rise of HK stock

Ben Kwok June 09, 2025 19:06

Trillion-dollar deposits that have been rapidly accumulating in Hong Kong's banking system over the years will need to find new avenues amid the exodus of US dollar investments two months after the tariff trade war, according to Louis-Vincent Gave, founding partner and CEO of the macroeconomic research firm Gavekal, who expects that Hong Kong stocks will benefit, especially high-dividend stocks.

Louis stated that in the past, investors only needed to focus on tech giants like Microsoft and Nvidia, but the investment environment has changed rapidly. Last month, the New Taiwan Dollar appreciated by 10% against the U.S. dollar in just three days in May, shocking investors and exporters in the Asia-Pacific region. For those who have long been over-allocated in U.S. assets must now quickly diversify their dollar investments.

Louis is bearish on the U.S. dollar, as Trump has abandoned efforts to improve the fiscal deficit. In the beginning, Trump talked about cutting spending to reduce the fiscal deficit, and the efficiency department led by billionaire Musk initially claimed it would cut spending by $2 trillion. Two months later, that target was reduced to $1.5 trillion, and the talks kept diminishing to $150 billion, and the latest figure is just a few hundred billion. Treasury Secretary Mnuchin is no longer discussing the fiscal deficit, only talking about accelerating economic growth.

“The U.S. government will not default on its debt, but will repay with what I call ‘monkey money,” said Louis, noting that international investors have already realized this direction and are beginning to withdraw investments from the U.S.

He believes that Asian currencies, especially the Renminbi against the US dollar, are severely undervalued. When the Asian currencies rise, the inflation pressure in the US will increase, and the inflow of capital into the US bond market will slow down, resulting in rising bond yields.

This new trend will have significant implications for Hong Kong's future development. Louis said in the past two years, Hong Kong has added US$250 billion in deposits. Over the past two years, Chinese investors and exporters could deposit the U.S. dollar to earn a 5% interest rate, alongside a 3% annual depreciation of the Renminbi. Compared to the mainland's zero inflation, the actual return is 8%.

But this year may be different, he noted because the short-term deposit interest rate for the dollar has dropped back to 3%, and if the Renminbi appreciates by 3%, the original 8% return turns into zero return.

In this new environment triggered by the flow of capital due to exchange rates, Hong Kong stocks will benefit. The large amount of US dollar stored in Hong Kong needs new outlets, and among them, high-yield stocks will be a better arbitrage option. He believes it is a good opportunity to borrow "cheap money" from banks to buy some high-yield stocks like PetroChina (00857) and earn high returns.

Louis believes that the United States will always pursue a small estate lake agreement for exchange rates, with Asian exporters including Taiwan, South Korea, Japan, etc., participating, but absolutely excluding China. This is because China is the largest trade surplus country and will certainly not easily give in; it depends on what the U.S. offers in exchange, which could be the U.S. not intervening in the Taiwan Strait or the Seventh Fleet staying away from Asia on national security issues.

As for the incident where Trump plans to prohibit Harvard University from enrolling international students, Louis believes it undermines the far-reaching influence of American education abroad.

“Education is America's biggest service export. Imagine foreigners sending their children to the U.S. where education is very expensive because America has the greatest relative advantage, attracting the best students globally to places like Harvard and MIT,” said Louis.

“Afterward, these talents might either stay in the U.S. to work or return to their birthplaces such as China, India, France, etc., entering government or business sectors. They will be influenced by American values and tend to admire American thinking in their respective fields. This kind of soft power helps solidify America's influence in the world.'

Louis is relatively cautious about the prospects of consumer markets in China. He points out that many middle-class individuals have suffered negative assets due to falling property prices over the past few years, which will take time to digest. The primary market in major cities has seen a recovery, but third- and fourth-tier cities are still very poor. The Hong Kong market took at least seven years to digest after the 1997 financial crisis before it could begin its recovery, while the overall mainland property market still needs time to return to normal.

Another reason is that major Western brands such as LVMH, Nike, Starbucks, and Apple, which have been making large profits in the Chinese market, are beginning to experience profit declines. 'The worst time for investing in China has passed, but whether we will face another tsunami is another story,' Louis concludes.

Like some Hong Kong people, Louis, a French national, currently splits his time between Hong Kong and Canada, spending most of the summer in Vancouver and winter in Hong Kong.

Fluent in French, English, and Mandarin, Louis travels to different cities every year to meet investors and finds it particularly convenient to have a home in Hong Kong, saying, "It's very easy to live here because everything is as usual, which gives me a sense of home."

Hong Kong is, after all, the center of the world.

He said, "Among the 100 largest cities in the world, 69 are within a 5-hour travel radius of Hong Kong. There are more people living within this circle than outside of it, which is why Hong Kong is the center of the world. In the next 10 years, most capital expenditures and infrastructure construction will take place within this 5-hour flight world."

India has built 70 airports in 5 years, and China has built 200 airports in 10 years, he said. However, it is surprising that these two populous countries have no direct flights connecting a total of 2.7 billion people. He believes that all this will change in the next 5 to 10 years, which means that aircraft leasing and airport financing will flourish.

More importantly, Hong Kong is currently the cheapest international financial center in the world.

He said, "Compared to New York, London, Tokyo, or Frankfurt, life in Hong Kong is the cheapest, and the Renminbi is outrageously cheap. You know, whether it's hotel prices, car prices, or airplane ticket prices, everything in China is too cheap compared to other places in the world."

Louis often travels between Beijing and other mainland cities and has witnessed the progress of China in the past 10 years, drawing the following conclusion:

"In China, everything is so smooth. As long as you have Alipay or mobile payment, everything is very simple. Therefore, China is so efficient, and everything is so cheap."

Ben Kwok

EJ Insight writer