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LCQ17: Impact of quantitative easing monetary policy implemented by the Federal Reserve on Hong Kong's economy

     Following is a question by the Hon Mr Frederick Fung and a written reply by the Financial Secretary, Mr John C Tsang, in the Legislative Council today (November 24):


     Given that in early November this year, the Federal Reserve of the United States ("the Federal Reserve") implemented the second-round quantitative easing monetary policy ("QE2") by buying US$900 billion Treasury bonds to support the sluggish economy of the United States ("US") and alleviate the high unemployment rate.  The Chairman of the Federal Reserve even said that where appropriate, policy instruments could be used to support economic recovery, suggesting that there is a possibility of further extending the scale of the aforesaid policy.  Various sectors have anticipated that hot money will continue to flow into Hong Kong, and will further push up asset prices.  In this connection, will the Government inform this Council:

(a) whether it has assessed the latest impact of the Federal Reserve's QE2 on Hong Kong's economy, including the overall economic conditions, capital flows, asset prices and inflation, etc.; if an assessment has been made, of the results;  

(b) apart from continuing to make verbal appeals to alert the public that as they are making investments at their own risks, they should do so according to their abilities and should not engage in too much speculative buying, what concrete and effective new measures the authorities have to prevent the inflow of hot money from forming asset-price bubbles that may lead to enormous market fluctuations; and

(c) whether the authorities have new measures to address the serious impact of the aforesaid surge in asset prices on people's livelihood; in respect of housing, whether they will yield to the wish of the public and consider afresh re-launching the Home Ownership Scheme, so as to prevent high property prices and property market fluctuations from creating housing problems and people's basic housing needs cannot be satisfied; regarding inflation, with the devaluation of Hong Kong dollar along with the US dollar and the continuous rise in inflation on the Mainland, the livelihood of the middle and lower classes has been affected as they rely mainly on cheaper food and daily necessities imported from the Mainland to maintain their quality of life, whether the authorities will implement new alleviating measures to help them face the pressure of rising prices; if they will, of the details; if not, the reasons for that?


(1) The Government is concerned about the second round of quantitative easing by the Federal Reserve in the US.  Whether this round of quantitative easing (known as QE2 in the financial markets) will help to provide impetus to the US economy, thereby propelling global economic growth, remains to be seen.  But the Government is mindful of the side effects of QE2 on the global economy.  QE2 will increase the liquidity in the global banking system further and prolong the exceptionally-low interest rate environment for an extended period.  Given Asia's brighter economic prospects, more fund flows into the region can be expected.  Asia is thus faced with increasing risks in inflation, asset bubble formation, as well as gyrations of financial and currency markets.  Hong Kong is no exception and likewise faced with similar challenges.  In particular, the abundant liquidity and low interest rates in Hong Kong will persist for an extended period.  This may further raise asset price inflation expectation, thereby intensifying the risk of an asset price bubble.  The Government is therefore mindful of the risks to macroeconomic stability stemming from QE2, and will monitor the situation closely.  

(2) The Government has been monitoring the development of the private residential property market closely and remains vigilant to the risks of a property bubble.  In the Budget in February, we have set out four strategies to stabilise the property market and reduce the risks of a property bubble.  They are:

1. increasing supply;
2. enhancing transparency;
3. preventing excessive leverage in mortgage lending; and
4. curbing speculation

     In pursuit of these four strategies, we announced in April and August further measures.  In his Policy Address in October, the Chief Executive announced a basket of short, medium and long-term measures.  These measures have been taking effects in stabilising the property market.  However, owing to extraordinary external factors, the private residential property market remains volatile.  More worrying is the exuberant state of the property market spreading to the mass market.  In addition, with the recent announcement by the United States Federal Reserve on the launching of the second round of "quantitative easing" amounting to US$600 billion, more funds are expected to flow to Asia, including Hong Kong.

     Taking into account these developments, the Government considered it necessary to introduce further measures targeted at speculators to curb speculative activities, reduce the risk of the development of an asset bubble and ensure the healthy and stable operation of the property market.  For these purposes, the Government announced on November 19, 2010 the following new measures:

1. A Special Stamp Duty (SSD) on top of the current ad valorem property transaction stamp duty.  The SSD is applicable to residential properties of all values at the point of resale if the properties are acquired on or after November 20, 2010 and resold within 24 months after acquisition.  The SSD will have three levels of regressive rates for different holding periods:

(i) 15% if the property has been held for six months or less;

(ii) 10% if the property has been held for more than six months but for 12 months or less; and

(iii) 5% if the property has been held for more than 12 months but for 24 months or less.

2. Deferred payment of the current ad valorem property transaction stamp duty for all residential property transactions valued at $20 million or below will not be allowed.  Coupling with the disallowance of deferred payment of stamp duty for all residential property transactions valued at more than $20 million which is currently in force, no deferred payment of the current ad valorem property transaction stamp duty for any residential property transaction will be allowed.  

     The Hong Kong Monetary Authority also issued on November 19, 2010 a set of new guidelines to banks requiring them to further strengthen their risk management standards for mortgage lending business by adopting the following measures:

(i) for residential properties valued at $12 million or above, the maximum Loan to Value Ratio (LTV) for mortgage loans should be lowered from 60% to 50%;

(ii) for residential properties valued at or above $8 million and below $12 million, the maximum LTV ratio should be lowered from 70% to 60%, but the maximum loan amount should be capped at HK$6 million;

(iii) for residential properties valued below $8 million, the maximum LTV ratio should be maintained at 70%, but the maximum loan amount should be capped at $4.8 million; and

(iv) for all non-owner-occupied residential properties, all properties held by companies and all industrial/commercial properties, the maximum LTV ratio should be lowered to 50%, regardless of property values.

(3)  To ensure the healthy and sustainable development of the property market, the Chief Executive in his Policy Address announced a basket of short, medium and long-term measures.  From a macro perspective, the Government needs a strategy on land development to address the root cause of the housing problem.  In the medium term, the Government will help the sandwich class purchase homes by launching the "My Home Purchase Plan" and make available land for small and medium-sized flats to respond to the shortage of such units in the private residential market.  In the short term, the Government will take appropriate measures to ensure the healthy and stable development of the private residential market, including controlling "inflated buildings", revising the Capital Investment Entrant Scheme, and examining the issues on regulating the sale of first-hand residential properties by legislation.  

     With regard to land supply, the Government has set a target for land supply in the next decade to provide land for the construction of about 20 000 private residential units annually.  In addition, public rental housing (PRH) is the cornerstone in maintaining Hong Kong's social stability.  The Government will continue to provide PRH to low income families who cannot afford private rental accommodation, and maintain the target of an average waiting time of around three years.  We have set up a "Steering Committee on Housing Land Supply" to co-ordinate the efforts of the departments concerned.  This will ensure that issues relating to housing land will be dealt with as a matter of priority to guarantee a stable and adequate supply of land for PRH and private residential flats, including small and medium-sized flats.  

     The Government has all along been providing financial support through the Comprehensive Social Security Assistance (CSSA) Scheme to help families in need meet basic living expenses.  Through the Social Security Allowance (SSA) Scheme (which is made up of Old Age Allowance and Disability Allowance), we also help elders aged 65 or above and persons with severe disability meet special needs arising from their old age or severe disability.

     Standard payment rates under the CSSA Scheme and rates of allowances under the SSA Scheme are adjusted annually in accordance with the movement of the Social Security Assistance Index of Prices (SSAIP) to maintain their purchasing power.  We informed the Panel on Welfare Services at its meeting on November 8, 2010 of the latest position of the SSAIP.  We expect that the payment rates will need to be adjusted upwards accordingly as from February 2011.  We will closely monitor the movements of the SSAIP and other economic indicators.  If necessary, we will make further adjustment ahead of the next adjustment cycle.  In addition, the Government has introduced a number of one-off measures in recent years in response to changes in the economic situation, sharing with Hong Kong people the fruits of economic prosperity and providing relief in difficult times.  The Government will continue to monitor the effect of inflation on low income households.  

Ends/Wednesday, November 24, 2010
Issued at HKT 13:31


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