Asset bubbles biggest threat for Asia: HKMA’s Chan

Source : Business Times – 15 Dec 2009

Asset bubbles are the No 1 threat to financial stability in Asia, meaning policy makers should avoid an excessive focus on inflation, said Norman Chan, the head of Hong Kong’s de facto central bank.

Based on Asia’s experience in the past 20 years, the biggest threat ‘is from asset bubbles, rather than inflation’, Mr Chan, the head of the Hong Kong Monetary Authority (HKMA), said in a speech posted on the organisation’s website yesterday. ‘I’m not saying that Asia does not need to worry about or guard against inflation, but I think we should focus more on the risk of asset bubbles forming and the associated damages.’

Mr Chan said more than HK$640 billion (S$115 billion) had flowed into Hong Kong since October last year, helping to drive up housing prices for 10 straight months. Donald Tsang, the city’s chief executive, said on Nov 13 that he was ’scared’ that money flowing into Asia because of low interest rates in the US could lead to another crisis in the region.

Mr Chan didn’t say that Hong Kong or Asia had bubbles. It’s difficult to assess when they’re forming, he said. ‘If it’s considered that bubbles have started to form, we should adopt appropriate and strong measures to prevent the bubbles from expanding too much,’ Mr Chan added in his Chinese-language speech.

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 the global economic recovery.

‘The current extremely loose global monetary policies and huge capital inflows provide the ideal conditions and ingredients for Asian asset bubbles to grow, so the potential risk of asset bubbles is not small,’ Mr Chan said.

Hong Kong’s monetary policy is limited by the local dollar’s peg to the US currency, meaning that the city’s interest rates track those of the United States.

Prices for existing Hong Kong homes rose 29 per cent 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.

Hang Lung Properties Ltd chairman Ronnie Chan said on 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 on Dec 3 that property prices in Hong Kong are still ‘reasonable’.

In October, the city tightened down-payment requirements for luxury homes for the first time since 1991 to curtail speculation.

Hong Kong should consider tightening lending rules to stop rapid credit growth and asset-price gains from damaging the economy, the International Monetary Fund (IMF) said on Dec 3.

‘Strong capital inflows and the resultant large liquidity overhang in the financial system could potentially lead to rapid credit growth, fuelling asset markets and creating macroeconomic volatility,’ the IMF said. ‘Countervailing prudential measures could play a role in mitigating the credit-asset price cycle.’

In Hong Kong, consumer prices advanced at the fastest pace in nine months in October as the government ended subsidy programmes and the city’s economic recovery encouraged spending. The increase was 2.2 per cent from a year earlier. In China, consumer prices rose in November for the first time in 10 months.