Showing posts with label currency board. Show all posts
Showing posts with label currency board. Show all posts

Tuesday, September 12, 2017

For the Second Time in 3 Months, HK Finance Chief Warns of the Property Sector’s “Dangerous Situation”


To be in fashion, one needs to embrace the wisdom of the crowd. And chasing asset prices have been the vogue.

But Hong Kong’s Financial Chief has chosen to against the crowd. Today, for the second time in three months, he warned that Hong Kong’s property market is in a “dangerous situation”.

From the Bloomberg (September 12 2017): (bold mine)

Hong Kong’s Financial Secretary Paul Chan warned potential buyers to be careful buying property in the world’s most expensive housing market, as moves by the Federal Reserve to unwind its balance sheet may shrink money supply.

Chan warned in June that Hong Kong’s property market is in a “dangerous situation” and vulnerable to a correction. Hong Kong Chief Executive Carrie Lam describes housing as citizens’ No. 1 concern and recently set up a task force on increasing land supply as she tries to rein in ever-escalating prices.

One has to be very careful if one really wants to buy a property in Hong Kong,” Chan said in an interview on the sidelines of a Belt & Road Forum in Hong Kong on Monday. Buyers need to assess their ability to service mortgages as interest rates normalize, he said.

Hong Kong home prices, the least affordable in the world, have surged 21 percent in the 12 months through June 30, the second-biggest gain globally after Iceland, according to a report from broker Knight Frank LLP. The boom in global house prices may be coming to an end as central banks worldwide step away from economic stimulus, with a slowdown in growth already evident in Europe, the broker said…

The Hong Kong dollar is pegged to the US dollar through a linked exchange system, managed by the currency board, the Hong Kong Monetary Authority (HKMA). Though the HKMA does not actively interfere in the foreign exchange market, it stabilizes the exchange rate mechanism by requiring US dollar deposits, functioning as reserves, from note issuing banks equivalent to their respective issuance of banknotes. With the exception of the $10 notes, all denominations of the Hong Kong dollar emanates from three private banks, specifically, the Hongkong and Shanghai Banking Corporation Limited, the Standard Chartered Bank (Hong Kong) Limited and the Bank of China (Hong Kong) Limited.

And because the Hong Kong dollar is pegged to the US dollar, Hong Kong’s economy essentially imports the US Fed’s policies. Thus, the HK Finance chief takes emphasis in the direction of the US Fed’s policies.

Hong Kong’s property market has been blazing. It holds the distinction as the world’s most expensive housing market. Last May, a car parking lot was sold for a record HK$23.3 billion ($3 billion). Raging speculation has even spread to public housing properties. Tesla sized micro-apartments, with a floor area of 161 square feet (15 square metres) sold at US $500,000, have been booming!

Of course, frenzied speculations have not just been in properties, Hong Kong’s major equity benchmark, the Hang Seng Index (HSI), has rocketed to close to its 2015 high of 28,060. The HSI closed today (September 12) at 27,972.24

The HK Finance Chief has been worried about the effect of the FED’s money supply to Hong Kong.
The Fed’s easy money policy has fueled the almost tripling of Hong Kong’s loans to the private sector which has been manifested in the balance sheet of the banking system and in money supply growth (nominal and yoy).

The recent acceleration of loans embodied in the M2 yoy has powered the all-time highs of property and near record stock market prices

Like everywhere else, such frantic yield chasing phenomenon had obviously been enabled and facilitated by negative real rates policies.


Hong Kong’s assimilation of the Fed’s policies has led to about 9 years of negative real rates.

The HK Finance chief expressed optimism that the economy can weather a property downturn.

My best wishes to him.