IMF urges HK to tighten lending rules

Source : Business Times – 4 Dec 2009

Hong Kong should consider tightening lending rules to prevent a credit-asset price cycle that may damage its economy, the International Monetary Fund said.

‘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 in a report yesterday.

Money spilling into Hong Kong from unprecedented lending under China’s stimulus programme and abundant US dollar liquidity has resulted in a 30 per cent surge in property prices and a 56 per cent jump in the benchmark stock index this year.

The IMF said Hong Kong needs to supplement the ‘circuit breaker’ measures already introduced to tame asset prices.

‘We expect the authorities to address the risks of overheating asset prices by mostly using tools on the supply side,’ said Enoch Fung, an economist at Goldman Sachs Group Inc in Hong Kong. ‘The first line of defence is to ensure more prudent lending practices, particularly in the mortgage market.’

Hong Kong’s Transport and Housing Bureau on Nov 20 said it plans to tighten rules on marketing of uncompleted apartments, responding to concerns that misleading sales tactics by developers contributed to a surge in prices this year.

The proposal follows measures announced by the government on Oct 23 to raise the required downpayment on luxury homes to 40 per cent from 30 per cent in order to curb property speculation.

In terms of additional regulatory action, IMF staff said the most effective tool that could be adopted by Hong Kong is a tightening of underwriting standards including eligibility criteria for mortgage insurance.

The US Federal Reserve’s policy of keeping interest rates near zero is fuelling the wave of speculative capital that may cause the next global crisis, Hong Kong’s Chief Executive Donald Tsang said on Nov 13.

‘We have a US dollar carry trade at the moment,’ Mr 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 IMF said yesterday that ‘as yet’ the price rises in Hong Kong’s equity and mass property markets ‘do not appear out of line with regional comparators’.

Hong Kong’s economic recovery ‘remains fragile’ and exposed to the risk of a weakening of external demand, even as policy makers grapple with asset price inflation, the IMF said.

‘The economy should steadily strengthen – growing at 5 per cent in 2010 – and unemployment should decline in the coming months,’ said the report.

Hong Kong’s economy grew for a second straight quarter in the three months through Sept 30, expanding 0.4 per cent from the previous quarter as consumption and investment gained. The seasonally adjusted jobless rate for the three months to Oct 31 slid to 5.2 per cent.