By Belcsak, Hans
Business Credit , Vol. 113, No. 3
The Special Administrative Region s economy has left the repercussions from the global crisis behind and is now on a robust growth trajectory, with all demand components showing strength. The expansion of real GDP appears to have reached nearly 7.0% in 2010, and while it is expected to moderate somewhat in 2011, it should still be on the order of 5.5%-6.0%. The local banking system has done very well in dealing with the financial market volatility that came with the crisis. Higher income from fees, trading and investment has made up for pared interest rate margins and profits have risen, while capital levels are significantly above regulatory requirements. Average loan-to-deposit ratios are still quite low and there is no shortage of liquidity.
The temporary blanket deposit guarantee that was offered during the worst of the worldwide upheavals expired on December 31, but on January 1, an increase in the coverage of the Deposit Protection Scheme to 500,000 Hong Kong dollars (HKD) from 100,000 kicked in, so that the net effect will not be dramatic. Inflation has rebounded from the nadirs in 2009, propelled by higher costs for utilities and some services such as education, tourism and transportation, and there is a risk that in time higher property prices will help to push the consumer price index upward. Even so, inflation is currently predicted to reach only about 5% by the end of 2011.
Of course, this is not a negligible rate, and there is now a trend underway that the International Monetary Fund defines as the credit-asset price cycle, which manifests itself in rising property prices that increase the availability of collateral, which, in turn, boosts the demand for housing, adding to property price inflation and "amplifying the cycle through a financial accelerator process." Surging real estate costs, driven higher in large part by wealthy mainland Chinese (of whom many buy apartments that they leave unoccupied) are already feeding into rents and will become an increased feature of consumer price inflation and possibly wages.
The authorities are quite aware of the risk and have put in place a number of policies to counteract the cycle, but given the magnitude of the underlying forces they can only mitigate the effects. What Hong Kong would need at this juncture is a substantial tightening of monetary policy, but the Hong Kong dollar's fixed relationship with the U.S. dollar (USD) makes this impossible. Instead, with the prospect of a U.S. monetary policy that will remain expansionary for an extended period, with near-zero interest rates and with much more mainland Chinese money flowing into the Special Administrative Region (SAR) than the People's Republic of China (PRC) regulations would ordinarily allow (it appears that mainland buyers of Hong Kong apartments and luxury goods use a number of avenues, including offshore accounts and mechanisms similar to the Middle Eastern "hawala" trades), the problems are all but certain to grow.
This has given new rise to talk that the HKD's firm tie to the USD is inappropriate and needs to be changed, even though the Hong Kong Monetary Authority [the de facto Central Bank (CB)] keeps stressing that it has no intention of tampering with a system that has served the city well for some 27 years. The Hong Kong dollar has been kept at about HKD 7.80:USD 1.00 since 1983, and since 2005 the CB has allowed the unit to deviate up to five cents on either side from this level. …