Citywire for Financial Professionals
Stay connected:

View the article online at http://citywire.co.uk/money/article/a450468

Housing market bubble warning for Hong Kong

While Hong Kong’s economic policies have spurred growth and boosted stability, they could also lead to a housing market bubble, the International Monetary Fund has warned.

 
Housing market bubble warning for Hong Kong

While Hong Kong’s economic policies have spurred growth and boosted stability, they could also lead to a housing market bubble, the International Monetary Fund has warned.

The warning came amid fears over the formation of asset bubbles in mainland China, in the wake of the Federal Reserve’s decision to pour a further $600 billion (£376 billion) into the US economy.

‘Imported monetary conditions are highly expansionary which is now translating into faster credit growth, increasing the prospects for a bubble in the housing market,’ the IMF said in its annual assessment of Hong Kong’s economy.

The organisation was referring to the exchange rate system, in which the Hong Kong dollar is pegged to its US counterpart. This results in the territory importing loose monetary policy – very low interest rates – from the United States, aimed at lifting the world’s largest economy out of recession.

But unlike the US, where economic growth is sluggish, the territory’s economy is likely to grow 6.75% this year and 5-5.5% in 2011, the fund predicted.

The system means Hong Kong cannot raise interest rates to tackle an asset bubble in the property market. China has criticised the Fed’s massive bond-buying scheme, known as quantitative easing, as likely to cause such bubbles by forcing investors to look for higher-yielding assets in emerging markets.

Anthony Bolton, Fidelity's star fund manager, has said it is unclear whether Hong Kong can continue tying its monetary policy to the US while its trade is principally with the rest of mainland China.

Should the territory change its monetary policy, the financial consequences could be ‘very significant,’ said Bolton, who runs the Fidelity China Special Situations fund from Hong Kong.

In the assessment, the IMF said: ‘As housing prices rise, more collateral will be available to support greater borrowing to finance housing purchases, amplifying the cycle through a financial accelerator process.

‘Higher property prices will lead to higher rents and the ongoing asset price inflation will feed into higher consumer prices.’

An acceleration of inflation in Hong Kong could lead to an appreciation of the real exchange rate, potentially pushing it above its equilibrium level, the fund said. It warned that this could cause deflation in goods, labour, and asset markets – resulting in a potentially ‘protracted and painful’ downturn.

Following the Asian financial crisis in the late 1990s, Hong Kong suffered deflation and a shrinking economy. From 1997 to 2003, housing prices in the territory slumped more than 60% before finally recovering.

Nonetheless, the IMF said Hong Kong’s dollar was broadly in line with economic fundamentals, and praised the territory for its ‘graduated response’ to property price inflation, including the deployment of tighter requirements on people to demonstrate credit-worthiness.

1 comment so far. Why not have your say?

Pat

Nov 18, 2010 at 14:40

I wonder when was the IMF assessment made.

It is reported in the press last week that Chinese banks have stopped lending to housing market, reason being the provision for this year's housing loan is exhausted. this will halt the speculation for a while. HK has been introducing various measures for years to stabilise the property prices. Alas, land is so scarce there.

There has been difficulty in adopting yuan in HK as there are very few investment mechanisms existed for yuan while HK is presently fully exposed to money making machines in the free world. There is no gain to hold yuan except it may appreciate one day - guess the Hongers are not so stupid unless they are pushed.

report this

leave a comment

Please sign in here or register here to comment. It is free to register and only takes a minute or two.

News sponsored by:

The Citywire guide to investment trusts

In association with Aberdeen Asset Management

Fund managers from Standard Life Investments quizzed on investment trusts


What can SLI bring to the table for those who want to put their money into investment trusts?

More about this:

Look up the funds

  • Fidelity China Special Situations PLC
    Register or Sign in to receive email alerts for items in your favourites whenever we write about them

Look up the fund managers

  • Anthony Bolton
    Register or Sign in to receive email alerts for items in your favourites whenever we write about them

More from us

Archive

Today's articles

Tools from Citywire Money

From the Forums

+ Start a new discussion

Weekly email from The Lolly

Get simple, easy ways to make more from your money. Just enter your email address below

An error occured while subscribing your email. Please try again later.

Thank you for registering for your weekly newsletter from The Lolly.

Keep an eye out for us in your inbox, and please add noreply@emails.citywire.co.uk to your safe senders list so we don't get junked.

Read more...

Tory tax cuts under threat as borrowing rises

by Alex Steger on Oct 22, 2014 at 09:27

Sorry, this link is not
quite ready yet