Asset bubble, not inflation, greatest danger
Updated: 2009-12-15 07:24
(HK Edition)
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HONG KONG: An asset bubble, rather than inflation, is the main threat to financial stability in Asia, according to Norman Chan, Chief Executive of the Hong Kong Monetary Authority (HKMA).
"Although I agree it is difficult to predict the occurrence of an asset-price bubble, I am certain that once a bubble is created, it will grow with immense power and suppressing it will be difficult. The bigger the bubble, the greater the devastation it will cause when it bursts."
"The best way to avoid the damage and heavy cost is to prevent the occurrence of a bubble or to contain it before it's too late," Chan said during a speech he made in a business forum held in Hong Kong yesterday.
"To do this, we have to make decisions at the early stage of a bubble's formation, not later. More importantly, when a bubble is taking shape, we have to take appropriate and effective steps to stop it from getting too big."
He noted that more than HK$640 billion have "flowed into the Hong Kong dollar" from October last year up to now, which will exert upward pressure on local asset markets.
Chan said the current extremely loose monetary policies around the world and the large inflows of funds provide an ideal environment for the formation of asset-price bubbles in Asia. However, Chan said Hong Kong cannot raise interest rates as it wishes, as this would attract more hot money with other undesirable consequences, so the city has to resort to other means to prevent the bubble from growing too large.
On the property market, Chan said banks have an important role to play by acting as gatekeepers in preventing sharp increases in mortgage lending, and that the measures that the HKMA has taken and good risk management by banks will help stop asset-price bubbles from forming.
On October 23, the HKMA asked banks to tighten the loan-to-value ratio for luxury properties priced at HK$20 million or more to 60 percent.
"While banks will help to control the risks, members of the public and corporations in Hong Kong also need to be more alert. They should consider what they can afford and not borrow too much at a time when interest rates are so low to avoid getting into financial difficulties when interest rates rise again," Chan said.
He warned that as hot money continues to flow into Hong Kong, pushing the market higher, people may get into the mistaken mindset that the market can only go up and overlook the risk that capital and hot money may one day reverse course without warning.
"We should not just rely on the government to stop the bubble expanding. It requires the involvement of banks, corporations and individuals - they need to be more risk-conscious and self-disciplined," Chan said.
China Daily
(HK Edition 12/15/2009 page4)