Liquidity Growth May Hurt Hong Kong Economy

"Liquidity Growth May Hurt Hong Kong Economy | AboutHK.Com - More Information About HK"

Dow Jones Hong Kong faces risk of rapid rise in credit growth and high asset price inflation due to the ample liquidity, which could slow the local economy, according to the latest International Monetary Fund working paper. Expansionary financial conditions in the city will likely have a greater impact on fueling asset price inflation through strong increases in equity prices, according to the paper. The paper discusses the potential macroeconomic implications for Hong Kong of accommodative monetary policy in the U.S. But the paper doesn't represent the view of the IMF. Higher asset prices could lead to further credit expansion and an upward cycle of asset prices and credit, the paper wrote. "This cycle, if unchecked, can potentially feed into volatility in consumption, output and employment and complicate macroeconomic management." This conclusion echoed the IMF's warning earlier this month that Hong Kong's extremely low interest rates and easy lending policies are prompting "a sharp run-up in prices for certain real and financial assets." "There is a risk that prices could become driven more by short-term liquidity conditions, divorced from fundamental forces of supply and demand," IMF said in a report on Nov. 3. Hong Kong's de facto central bank chief executive Norman Chan also expressed concern on the city's asset price inflation. Chan warned Thursday the continued inflow of funds into Asian asset markets could pose risks for Hong Kong next year. He said asset prices in the city could rise sharply in 2010, increasing the risk of bubbles forming in the economy. The Hong Kong government shows the city attracted a record HK$567.5 billion worth of fund inflows between Oct. 1, 2008 and Nov. 13, 2009. Hong Kong's asset markets have rebounded strongly, with the stock market's benchmark Hang Seng Index up 56% since the start of the year, while the residential property market has risen 30%, capped by a number of record transactions in the luxury sector. -By Chester Yung, Dow Jones Newswires; 852-2802-7002; chester.yung@ dowjones.com (END) Dow Jones Newswires 11-20-092342ET Copyright (c) 2009 Dow Jones & Company, Inc.