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LCQ5: Measures to tackle problems of inflation and inflow of hot money

     Following is a question by the Hon Vincent Fang and a reply by the Acting Financial Secretary, Professor K C Chan, in the Legislative Council today (December 8):

Question :

     The quantitative easing monetary policy of the United States ("US") has led to a massive inflow of capital into Hong Kong's investment markets and intensifies the risk of an asset bubble, the Financial Secretary therefore introduced further measures to curb property speculation on November 19, 2010.  There have been comments that these measures mainly target at the luxury property market, in which prices have recently surged more sharply.  As for commercial and industrial properties, particularly shops, the measures are less severe and there is no corresponding measure for medium and small-sized residential flats at all.  In addition, the continuous depreciation of the Hong Kong dollar under the linked exchange rate with the US dollar has resulted in an aggravating inflation trend, and capital will also shift to seek other avenues.  In this connection, will the Government inform this Council:

(a) of the performance of the property market since the introduction of the aforesaid measures to curb property speculation on November 19 this year; whether the Government's expected targets have been met; whether capital in the market has shifted from the luxury property market to the markets of commercial and industrial properties, shops and small-sized residential flats; how the Government is going to cope with the formation of asset bubbles in these markets;

(b) given that the Financial Secretary has earlier adjusted upwards the annual inflation rate by only 0.2 percentage point to 1.7% while Asian countries (including those which are less vulnerable to the impact of prices in other countries) have all adjusted upwards their annual inflation rates to 4% or 5%, and the prices of major daily necessities and food in Hong Kong have experienced high double-digit increases in recent months, whether it has assessed if Hong Kong has underestimated the actual inflation and its impact; in view of the continuous weakening of the Hong Kong dollar, whether the current method of calculating inflation will be modified to reflect the actual situation; and

(c) given that the Financial Secretary has expected that hot money will continue to flow into the Hong Kong market and that the interest rates in the US will remain low, but he also anticipates an eventual bounce-back of interest rates, whether the Government has made any projections as to how Hong Kong's economic activities will be affected, how volatile the investment markets (including the banking sector) will become and how much loss these markets will incur when the interest rates go up and capital is withdrawn from Hong Kong?



     My reply to the three parts of the question raised by the Hon Vincent Fang is set out below:

(a) Mainly due to the global financial situation, the local property market has become increasingly exuberant of late.  More worrying, the exuberance has started to spread from the luxury market to the mass market.  Currently global liquidity is abundant, and interest rates remain extremely low.  Following the US Federal Reserve's second round of quantitative easing measures, more funds are expected to flow into Asia, including Hong Kong, thereby further boosting the heated market sentiment.

     In order to reduce the risks of a property market bubble, on November 19 the Government announced a new round of anti-speculation measures, including the introduction of a Special Stamp Duty (SSD) on short-term resale of residential properties (i.e. resale within 24 months of properties acquired on or after November 20, 2010).  The Hong Kong Monetary Authority (HKMA) also further lowered the maximum Loan-to-Value ratio for mortgage loans made by banks.

     Exuberance in the residential property market cooled down visibly over the past few weeks, suggesting that the new measures have to a certain extent achieved the intended effects.  While the latest figures of overall flat prices and transactions are not yet available, reportedly secondary transactions for the major residential developments have dropped noticeably following the announcement of the new measures.  Quite a number of sellers have cut their asking prices, and transacted prices for some major residential developments have also declined in general.  Given that the SSD is applicable to all residential units regardless of the size or value, there should not be capital switching from the luxury market to the mass market.

     As regards industrial/commercial property and retail space, these transactions are commercial activities.  Compared with the residential property market, the considerations for transactions of industrial/commercial property and retail space are generally larger.  Many investors in this market segment are more experienced with higher risk awareness.  The HKMA's newly announced mortgage-tightening measures also include the lowering of the maximum Loan-to-Value ratio for mortgages of industrial/commercial property and retail space.

     Be it the residential or non-residential markets, when faced with huge capital flows the Government's policy focus is to safeguard against systemic risks, with a view to maintaining macroeconomic and financial stability.  The Government will ensure that the financial institutions remain prudent in extending loans, and forestall credit expansion and asset price inflation forming a vicious circle, thereby reducing the possible shocks in the event that capitals retreat.  We will continue to monitor the market situation closely and introduce appropriate measures without hesitation when necessary.  

(b) In the first ten months of 2010, the year-on-year rate of underlying consumer price inflation averaged at 1.5%.  With the sustained rise in food prices and housing rentals as well as further increase in import prices, underlying consumer price inflation is now forecast at 1.7% for the year as a whole, revised upwards from 1.5% in the August round.  The forecast rate of headline consumer price inflation for 2010 as a whole is also revised upwards accordingly, from 2.3% to 2.5%.

     According to the Composite Consumer Price Index (CPI), the year-on-year rate of change in prices of basic foodstuff had been higher than the headline inflation rate since April 2010.  In October 2010, the year-on-year increase in prices of food (excluding meals bought away from home) in the Composite CPI was 5.7%, higher than the overall headline inflation rate of 2.6%.  In particular, prices of fresh vegetables and fresh fruits rose considerably by 19.8% and 11.8% respectively.  On the other hand, in the Composite CPI, year-on-year decreases were recorded in the prices of durable goods (-3.1%) as well as clothing and footwear (-0.4%).

     The CPI is compiled based on a continuous Monthly Retail Price Survey conducted by the Census and Statistics Department, and the compilation methodology is in line with international statistical standards.  Each month, the Department collects some 45 000 price quotations from around 4 000 retail outlets (e.g. supermarkets, market stalls, department stores and fashion shops) and service providers (e.g. cinemas, hospitals and beauty salons) throughout the territory.  Thus we believe that the CPI can effectively reflect the latest trend in consumer price inflation.

     It should be noted that the CPI reflects the collective experience of inflation for all households.  As each household has its own expenditure pattern and prices increase or decrease at varying rates and timing across different consumer goods and services, hence inflation would not affect all households to the same extent.

     The International Monetary Fund (IMF) released the inflation forecast for the year for various major economies in its publication "World Economic Outlook" in October 2010.  The forecast inflation rates for Korea, Australia, Singapore, New Zealand and Taiwan are 3.1%, 3.0%, 2.8%, 2.5% and 1.5% respectively.  Thus compared with other economies at a similar stage of development in the Asia-Pacific region, Hong Kong's headline inflation rate for this year stands in the middle of the pack.

     The Government's inflation rate forecast for this year has fully taken into account the likely price movements in the remainder of the year.  We have also noted that upside risk to inflation has increased of late, with the pickup in wages and rentals amid sustained expansion of the local economy, and with higher inflationary pressures due to a weaker US dollar and elevated world commodity prices.  The second round of quantitative easing in the US will also spur capital flows into Asia and further increase inflation risk in the region.  The impact may become more notable next year.  Pressure on renminbi appreciation has also increased recently.  This, coupled with the faster rise in food prices in the Mainland, will inevitably affect food prices in Hong Kong, given that the Mainland is our major supplier of foodstuffs.

     The Government is monitoring the inflation situation closely, especially the impact on the low-income people.

(c) The Government is very concerned that the second round of quantitative easing in the US may spur capital inflows into Hong Kong and increase volatilities in the local stock and property markets.  As the external environment is fraught with uncertainties, it is difficult to predict the timing and impact of a reversal in capital flows.

     On the policy front, the most important things are to ensure the sound fundamentals of the economy and the stability of the financial systems, to avoid over-consumption or over-borrowing at times of ample liquidity, and to forestall an overheating economy and the building up of systemic risks.  By doing so, even a reversal in capital flows will not bring about significant impact on the overall economy or the financial systems.

     Over the past year or so, the Government has introduced several rounds of stabilisation measures to forestall housing market bubble risks, and on November 19 announced further measures to prevent the formation of an asset bubble.  We have also reminded the regulators of the need to review various policy tools, aiming at reducing the systemic risks brought about by the ample liquidity.  These include, among other things, watching closely the asset quality and trading activity of banks as well as monitoring and reducing the extents of leveraging in the markets when asset bubble risks are on the rise.  We will continue to monitor the situation and respond as necessary to the changes in the environment.

     While the Government will do its part thoroughly, it is equally important for the community, including small investors, to adopt prudent risk management and avoid over-leveraging or speculation, so as to avoid losses in case of a sudden reversal of the markets in the future.

Ends/Wednesday, December 8, 2010
Issued at HKT 14:47


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