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Following is a question by the Hon Mrs Regina Ip and a written reply by the Financial Secretary, Mr John C Tsang, in the Legislative Council today (November 4):
Question:
It has been reported that due to a continuous inflow of hot money into Hong Kong from various places in recent months, the Aggregate Balance of the Hong Kong banking system as at September 15 this year rose to about HK$230 billion, while the Monetary Base in Hong Kong as at the end of August this year rose to about HK$790 billion. Moreover, with the support of mainland buyers, the Hong Kong real estate market (especially the luxury real estate market) has continued to rise in recent months, arousing market concerns that there would be a bubble-burst of the real estate market. In this connection, will the Government inform this Council:
(a) if it has looked into whether the recent continuous rise in property prices in Hong Kong is caused by the persistent inflows of hot money into the Hong Kong market from various places, and whether the Government intends to adopt measures to prevent the occurrence of "overheating" in the entire real estate market;
(b) given that the Hong Kong Monetary Authority ("HKMA") has to inject funds into the market to buy US dollars when the exchange rate of Hong Kong dollar against the US dollar touches the strong-side Convertibility Undertaking, which stands at HK$7.75, according to the requirement of the operational mechanism of the Currency Board system, whether it has assessed if the measure of increasing the supply of Hong Kong dollars persistently by HKMA will trigger off rises in consumer prices; if the assessment outcome is in the affirmative, how HKMA curbs such rises in consumer prices;
(c) whether the authorities will consider widening the floating range of Hong Kong dollar's exchange rate against the US dollar to foster the long-term development in Hong Kong's macro-economy and maintain the stability of the financial system; and
(d) given that Hong Kong's economy is increasingly close to the Mainland, and China and the United States are for a long time at different economic cycles, whether the Government will consider linking the Hong Kong dollar to Renminbi in the future?
Reply:
President,
(a) Residential property prices are affected by the relative supply and demand conditions in the housing market. Abundant liquidity in the banking sector is one of the factors that can shape the housing demand conditions. Other factors include economic fundamentals, market sentiment, households' financial position, affordability and the opportunity cost of owner-occupied housing, etc.
While household income in Hong Kong has generally fallen after the financial crisis, mortgage interest rates remain at low levels, thereby keeping housing affordability relatively stable. Taking a flat of 45 square metres in saleable area under a general mortgage term of 20 years as an example, according to the figures of the second quarter of 2009, the mortgage repayment accounted for about 34% of the median household income of dwellers in private residential properties, and this was much lower than the 93% at the peak in 1997. It was still better than the average level of 53% over the past two decades.
The Hong Kong Monetary Authority (HKMA) notes that the prices of luxury properties have increased rapidly in the last few weeks. Prices of Class E properties (size of 160 square metres or above) have already exceeded their peak in the third quarter of 1997 and the risks of banks lending to this market segment have increased significantly. At present, the prices of individual high-end properties have surpassed the peaks in 1997, but in the sector of small/medium flats, prices are still about 25% lower. About 90% of the property transactions over the past few months were predominately of small/medium flats (i.e. flats of saleable area below 70 square metres), and the buyers were mainly users.
To ensure that banks properly manage the risks of mortgage lending, and to safeguard the stability of the banking system, the HKMA wrote to banks on October 23, 2009, requiring them to reduce the maximum loan-to-value ratio for properties with a value of HK$20 million or more from 70% to 60%. The HKMA also demanded banks to strengthen their risk management system for mortgage lending, including conducting valuation of properties prudently and carefully assessing borrowers' repayment ability. In particular, banks should assess the potential impact on borrowers' repayment ability if the current unusually low interest rates were to return to more normal levels. The HKMA intends to conduct a round of thematic examinations in the near future to check banks' compliance with the above requirements.
The Government policy on private property market is to maintain a fair and stable environment to enable sustained and healthy development of the property market. The Government is very concerned about the sharp rise in prices in the property market recently, particularly those of the luxury end. As pointed out by the Chief Executive in his Policy Address, Government will closely monitor market changes in the coming months. If necessary, we will fine-tune the land supply arrangements, and discuss with the Urban Renewal Authority and MTR Corporation Limited with a view to speeding up the pace of bringing readily available residential sites to the market. The Government understands the ramifications our policy decisions will have on the operation of the property market, and we will act prudently.
(b) Hong Kong has inherited low nominal interest rates and imported quantitative easing under the Linked Exchange Rate System (LERS). Accommodative monetary conditions are appropriate given that Hong Kong is in the early stage of recovery. While a continuous loose monetary environment may heighten the risk of inflation in the future, local inflationary pressure has been subdued recently, with year-on-year headline Composite Consumer Price Index inflation rate remaining subdued since mid-2009.
Partly reflecting slow economic recovery, global inflationary pressure is expected to remain muted in the near future. On the other hand, should global inflation return, central banks, including US Federal Reserve, would probably exit from quantitative easing and raise interest rates. Under the LERS, Hong Kong's monetary conditions would automatically tighten along with the US to relieve inflationary pressure.
Under the LERS, the primary monetary policy objective of Hong Kong is to maintain the exchange rate stability of Hong Kong dollar against US dollar, rather than to target asset prices or consumer price inflation. In fact, for a small and open economy like Hong Kong, room for policy manoeuvre under a flexible or fixed exchange rate regime is substantially restricted by large and volatile capital flows. Over the longer term, the LERS has proved to be an important anchor for monetary stability in Hong Kong.
(c) Widening the exchange rate band will likely fail to promote the long-term macro-economic development and stability of the financial system, as it may invite market speculations on the likelihood of further band-widening, thereby undermining the credibility of the LERS. In the current circumstances, such a move may also induce expectation of further appreciation of the Hong Kong dollar, and hence encourage more capital flows into Hong Kong.
(d) We believe that the US dollar continues to be the more appropriate anchor currency for the Hong Kong dollar than the renminbi, taking into account factors such as international usage, business cycle synchronisation, the stage of economic development and currency convertibility:
(i) The renminbi is still not fully convertible, making it technically infeasible to be a reserve currency. Yet convertibility of the currency is not the only factor for consideration. The appropriateness of an anchor currency should consider, among other factors, its ability to maintain Hong Kong's monetary and financial stability, its potential impacts on trade, finance and the status of Hong Kong as an international trade and financial centre, and the commonality of shocks faced by the two economies.
(ii) The US dollar is still the most commonly used currency for conducting international trade and financial transactions, so pegging to the US dollar can help the development of Hong Kong as an international trade and financial centre.
(iii) Despite increased economic and financial integration, the economies of Hong Kong and the Mainland are at very different stages of economic development and the difference is unlikely to disappear in the near future.
(iv) An HKMA research shows that business cycle synchronisation between Hong Kong and the US is higher than that between Hong Kong and the Mainland, so monetary policy stance in the US is generally more appropriate to the circumstances of Hong Kong through economic cycles, although in the short run that may not necessarily be the case.
(v) The appropriateness of the LERS should be judged by its ability to deliver monetary and financial stability in Hong Kong through economic cycles, and should not depend solely on the cyclical condition of the economy at a particular time.
Ends/Wednesday, November 4, 2009
Issued at HKT 14:53
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