Hong Kong Risks ‘Sharp Corrections’ in Asset Prices

By Sophie Leung

Dec. 17 (Bloomberg) -- Hong Kong’s central bank said the city may face “sharp corrections” in asset prices should fund flows reverse, adding to concerns voiced by Japan, China and South Korea on the dangers of speculative capital.

A rally in the stock market was fueled by an influx of capital as investors’ risk appetite gained and they bet on an improving outlook for China’s economy, the Hong Kong Monetary Authority said in a quarterly report yesterday. Outflows may bring “volatilities in the real economy,” the HKMA said.

Housing prices in Hong Kong have gained for 10 months, while the benchmark Hang Seng Index has surged 48 percent this year. Financial officials in Japan and China, Asia’s two largest economies, warned last month that the Federal Reserve’s interest rate policy risks spurring speculative capital that may inflate asset prices and derail an economic recovery.

“It’s highly probable that the asset markets would show fluctuations once the fund flows reverse if the U.S. raises interest rates,” Peng Wensheng, a Hong Kong-based economist with Barclays Capital, said. “The risk isn’t restricted to Hong Kong, but extends to emerging markets, especially in Asia.”

The Hang Seng Index fell 1.2 percent at the close, led by property companies. New World Development Co., a developer controlled by billionaire Cheng Yu-tung, dropped 3.3 percent.

No. 1 Threat

The HKMA left its base lending rate unchanged today at a record-low 0.5 percent after the U.S. Federal Reserve stayed put. The city’s rates track those in the U.S. because Hong Kong’s dollar is pegged to the U.S. currency. The Fed repeated yesterday its pledge to keep borrowing costs “exceptionally low” for an extended period.

Asset bubbles are the No. 1 threat to financial stability in Asia, Norman Chan, HKMA’s chief executive officer, said Dec. 14. More than HK$640 billion ($83 billion) has flowed into the city since October last year, he said.

The Fed has kept benchmark interest rates near zero percent since December 2008 to revive lending after the worst financial crisis since World War II. China’s “moderately loose” monetary policy has fueled record lending in that country.

“The resultant loose monetary environment may heighten the risks of asset-price and consumer-price inflation through the expectation and credit channels,” the HKMA said yesterday.

Hong Kong has kept its base rate at 0.5 percent since December and asked banks to help support the economy. The HKMA has also added money to the market by buying U.S. dollars to prevent the city’s currency from strengthening beyond its fixed- exchange rate maximum.

Asian Problem

Donald Tsang, Hong Kong’s chief executive, said Nov. 13 that he was “scared” that money flowing into Asia could lead to another crisis.

“We have a U.S. dollar carry trade at the moment,” Tsang said. “Where is the money going -- it’s where the problem’s going to be: Asia. You can see asset prices going up, not only in Korea, in Taiwan, in Singapore and in Hong Kong, going up to levels that are incompatible or inconsistent with the economic fundamentals.”

The carry trade is where investors borrow cheaply in one currency and use the funds to invest in other currencies.

Prices for existing Hong Kong homes rose 29 percent this year, according to the Centa-City Leading Index, a weekly measure developed by Centaline Property Agency Ltd. and the City University of Hong Kong.

The price jump has sparked a public outcry, spurring the government to tighten down-payment requirements for luxury homes for the first time since 1991 to curtail speculation.

Billionaire’s Forecast

Hang Lung Properties Ltd. Chairman Ronnie Chan said Dec. 4 that Hong Kong’s home market is a “good bet,” joining billionaire Lee Shau-kee in forecasting rising prices. Sun Hung Kai Properties Ltd. Vice Chairman Raymond Kwok said Dec. 3 that property prices in Hong Kong are still “reasonable.”

Home prices plummeted during the 1997-98 Asian financial crisis, falling 56 percent in October 1998 from a record high a year earlier, according to the Centa-City index. The 2000 dot- com bubble burst, the Sept. 11, 2001, terrorist attacks and SARS disease epidemic in 2003 caused prices to fall as much as 70 percent from the pre-crisis peak.

Hong Kong’s economy grew for a second straight quarter in the three months through Sept. 30 this year as consumption and investment gained. The economy will further improve next year, and consumer-price inflation is expected to “remain anchored” in the first half of 2010, HKMA said in its report.

Consumer prices rose 2.2 percent in October from a year earlier, after the biggest fall in five years in August, as the government scrapped subsidies and the economic recovery encouraged spending.

To contact the reporter on this story: Sophie Leung in Hong Kong at sleung59@bloomberg.net