As the level of violence rises in Hong Kong amid ongoing pro-democracy demonstrations, liquidity in the Asian financial hub seems to have tightened considerably, raising fears of capital flight.

However, there may be other factors at play that could be influencing the amount of money in the territory not linked to investors pulling their cash out of the city.

According to data from ING, one liquidity indicator, Hong Kong’s Inter-bank Lending Rate (HIBOR), the amount of interest banks in the territory charge when lending to each other, has moved to a positive spread against the international benchmark, LIBOR, from a negative spread, indicating that Hong Kong dollar interest rates have risen.

The shift began in mid-June when incidents of protest-related violence began to increase in the city.

High positive spreads between HIBOR and LIBOR have often occurred during periods of financial stress and capital outflow in Hong Kong; notably during the Asian financial crisis of 1997 when the spread rose to 10 percentage points.

While ING said the current rise did “not look particularly alarming” given recent history, it cautioned against complacency because the spikes can happen rapidly.

All may not be as it seems

While the HIBOR-LIBOR spread may be an indicator of a rising risk of capital outflow, other factors may dispute the conclusion that money is flowing out of Hong Kong.

For example, the Hong Kong Dollar is linked to its US counterpart through an exchange rate system that ranges between HK$7.75-7.85 against the greenback.

Since violent incidents related to the protest movements began in mid-June, the Hong Kong Dollar has strengthened to around HK$7.80, which ING attributed to several initial public offerings (IPOs) and dividend pay-outs from companies listed on the Hong Kong Stock Exchange (HKEX), which in turn caused a “short term liquidity squeeze”.

“The exchange rate does not support the story of capital outflows,” said ING’s analysts, adding that while currency volatility was higher over the last six months it was still “low relative to historical levels”.

The ‘Alibaba effect’

Another pressure on liquidity not associated with the protests or capital flight is the IPO of Chinese e-commerce giant Alibaba, which listed on the HKEX on Wednesday in the largest float for the exchange since 2010.

This ‘mega-IPO’ of Alibaba has created tensions for interbank lending as Hong Kong’s banks and broking houses have had to put aside as much as HK$300bn (£29.6bn) to finance the float, around 3% of the city’s deposits, which by itself would have been enough to push up HIBOR.

Is there cause for concern?

While the ongoing instability caused by Hong Kong’s protests may be causing some to pull their cash out, ING said it was likely that more funding was flowing into the territory than out of it at this time.

However, analysts warned that the effect of the Alibaba IPO could have “masked the protest-related outflows” and that another increase in the HIBOR-LIBOR spread alongside a weakening of the Hong Kong Dollar could show signs capital flight once the “IPO-driven liquidity squeeze” subsides.