HONG KONG (MarketWatch) — Plans by the U.S. Federal Reserve to taper its financial-asset purchases have already sent various emerging-market currencies into a tailspin. Could Hong Kong be the next to suffer?

On Friday, Hong Kong Monetary Authority chief Norman Chan said the money which had flooded into Hong Kong since the start of U.S. quantitative easing will “inevitably” reverse as the Fed begins to taper. He put the total of QE-driven inflows at 100 billion Hong Kong dollars ($12.9 billion).

Hand-ringing warnings from Hong Kong officials are hardly uncommon, and up to now have largely been ignored by investors. But as we move from expectation of tapering to execution, is it time to start paying attention?

The upcoming Federal Reserves Open Markets Committee meeting on Sept. 17-18 is widely expected to give more clarity on how tapering — or reduction of financial-asset purchases by the Fed — will proceed.

Already, the mere expectation of a reversal in the unprecedentedly accommodative U.S. monetary policy has jolted Asian markets. One effect of QE was to boost the attraction of riskier assets, including those in the emerging markets. Now, as this cheap-money pot gets removed, higher-risk carry trades are being reassessed.

So far, it has been countries running current-account deficits and reliant on foreign-fund inflows for growth that have been punished. The two most affected economies in the region have been Indonesia and India, where the rupiah USDIDR, -0.64% has sunk to multi-year lows, and the rupee USDINR, -0.06% to historic lows.

But who will be hit next if there is a tapering contagion? The risk is that the search for other vulnerable currencies or asset markets will now spread.

China, for one, has been getting increasingly vocal about the risks. At last week’s Group of 20 meeting, its deputy finance minister repeated calls for the world’s largest economy to be “mindful of the spillover effects” as it reduces its support for financial markets.

With a closed capital account and large trade surplus, China should in theory be less concerned about shifts in Fed policy. Yet this overlooks how China has become more reliant on hot capital flows for its cheap financing costs in recent years.

One explanation for this concern about U.S. monetary policy is that officials have already had a whiff of what a post-tapering world might hold. Some analysts blame the recent spike in Chinese interbank rates in June on an unwinding of the popular yuan carry trade as risk capital retreated.

China’s leaders now know that their financial markets are no longer ring-fenced from global finance.

Hong Kong by contrast is well known to be closely connected to international financial markets and the actions of the Fed. Its currency peg to the U.S. dollar means it effectively has to follow U.S. monetary policy.

China's shadow-banking problem

It is Hong Kong’s frothy property market that looks most exposed to tapering. After all, the exit of funds which the HKMA chief is now concerned about had previously sent interest rates to record lows and property prices to record highs as they entered the economy.

Since 2008 and the start of quantitative easing, property prices have risen a stunning 120%. A recent edition of the Economist again showed in a comparison of international property prices that Hong Kong’s were off the scales in terms of the degree of overvaluation.

What’s more, international fund flows had a direct impact on Hong Kong property as it sent short-term money-market rates almost to zero, which were later used to price mortgages.

Banks, awash with liquidity, started offering mortgages based on the Hong Kong interbank offered rate (Hibor). Hence, you have risky looking financing, given there is now a direct linkage between international money flows and property loans.

So far there has been little sign of impact on Hibor, although banks have nudged up their rates on new mortgages.

But Hong Kong’s property market is beginning to display signs of vulnerability. In addition to anxiety over external monetary conditions, buyers are also faced with a variety of new measures and property taxes introduced to curb speculation and high prices.

This has sent the property market into a deep freeze, with transactions falling to their lowest levels in a decade.

The question is whether the arrival of tapering in the U.S. will tip the balance in the current standoff between buyers and sellers.

Timing remains uncertain. So far, we are at the stage of discounting tapering with no change in the fed funds rate expected until at least next year. But tighter money could be felt before that if money-market rates do move.

Yet another factor to consider is whether we should be looking next door to explain Hong Kong’s prodigious liquidity growth. Hong Kong is also awash with so called “gray money” seeking to discreetly exit mainland China and bypass exchange controls.

It would be hard for Norman Chan to worry about its retreat when its was never meant to be here in the first place. If that is the case, investors should also keep a close eye on liquidity in Macau casinos for an early warning on Hong Kong.