HONG KONG (MarketWatch) - News that Italian fashion house Prada is mulling an initial public offering in Hong Kong underscores the city-state's place at the height of fashion for new listings. Not content with surpassing London, Shanghai and New York in funds raised this year, Hong Kong's bourse is even pulling in top European fashion names.

Is this another signs asset markets in Hong Kong are spinning out of control in a glut of liquidity or just further evidence of the economic swing towards Asia?

Prada would certainly look a little out of step next to existing Hong Kong retail names such as Bossini, Giordano and Esprit. But perhaps this reflects the changing face of the city as a shoppers' paradise. For the new mainland Chinese tourist, the draw card is not copy watches and street markets, but the chains of luxury brands selling their wares duty free. Prada's move is also likely recognition of the growing importance of the Chinese consumer, which is on course to surpass Japan in household wealth in the next five years, according to a new report by Credit Suisse.

Still, the Italian brand will want to make sure it does not suffer an identitycrisis, where listing in Hong Kong translates into 'made in Hong Kong' or 'made in China.' No doubt, a key consideration is the rich valuations and large investorappetite for new listings in Hong Kong.

Hong Kong has become the dumping ground for global liquidity, squeezed between unprecedentedmonetary easing in the West and speculative money flows exiting China. One illustration of the advantageousliquidity conditions is that Agricultural Bank of China now trades at a 30% premium in Hong Kong to Shanghai after its mega dual listing three months ago. This all means Hong Kong is in the liquidity sweet spot for IPOs globally, where everyone tends to look better on the new listing catwalk.

This year, $23.9 billion has been raised from 53 IPOs, and Hong Kong is now preparing for the bumper $15 billion listing of AIG's AIA arm.

In recent days, it appears the pace of money circulating in Hong Kong is accelerating. Last weekend, buyers splashed out 13 billion Hong Kong dollars ($1.68 billion) on new properties, while during the week, turnover on the stock market rose above HK$100 billion for only the second time since November last year, as the Hang Seng Index reached a two-year high.

One element driving this is cheap money and negative real interest rates, with inflation running at 3%. For example, HSBC in a recent press release lists its savings rates: $5,000, $50,000 or $1 million on account, all pay 0.001% interest. At the same time, the bank appears to be aggressively seeking to lend money, if the offers of no-fee cash advances in my mail box are anything to go by.

While these loose money conditions have supported the stock market, it has also led to growing controversy over high property prices and the risk of an asset bubble. Despite a series of anti-speculation measures by the government, there are few signs of a property slowdown. Rather, property stocks have been rallying strongly - Cheung Kong Holdings, property developer of Hong Kong tycoon Li Ka-shing, is now up 25% since August.

This will provide an interesting backdrop as Chief Executive Donald Tsang gives his policy address on Wednesday, with the market looking for some direction on official thinking on the economy and asset prices. Perhaps the movement in developer prices tells us there will be little measures with teeth.

For many other Asian countries from Japan to Thailand, the big policy issue just now is the multi-year highs currencies are making against the dollar. And while China is receiving criticism from all quarters on its peg to the greenback, it is surprising how little attention the Hong Kong dollar peg gets. This is undoubtedly one factor contributing to capital flows as investors bet that if it does not move in tandem with the region, asset prices will take the strain.

In the meantime, macroeconomic conditions are undeniably favorable for Asian equities, note Nomura in a new strategy report. While valuations would normally be contracting as the market faces a slowdown in earnings momentum, a combination of negative real rates, hot-money inflows and rising price (assets and goods) are expanding the multiples.

Put another way, the 'P' is rising while the 'E' is declining. Little surprise then, new issues are making a beeline to Hong Kong, the most liquid and international of Asian markets.

Still, the investment banks notes these benign conditions might not last.

'The biggest risk for Asian markets is the rising probability of competitive devaluations in [the Group of Three major economies] disrupting monetary operations in Asia through capital inflows and higher local inflation.'

The answer, it seems, is to be on the watch for any reversal in capital flows which, like fashion trends and the market for IPOs, can be notoriously fickle.

-By Craig Stephen