US stimulus endangers Hong Kong; recession now more likely

The massive new stimulus announced by the US Federal Reserve Sept. 13 has forced Hong Kong to take immediate action to prevent its tumble into recession and a return of the property bubble.

The Hong Kong Monetary Authority ordered banks on Sept. 14 to curb home loans to borrowers with more than one mortgage to prevent Hong Kong being flooded with hot money, less than a day after Fed Chairman Ben Bernanke announced an open-ended stimulus plan to spur US growth and boost anemic employment.

HKMA also said it is restricting the maximum length of a mortgage to 30 years. Some banks had been offering home loans of up to 40 years. It had previously imposed restrictions on the maximum amount people can borrow on high-value homes, and imposed a tax penalising the fast resale of homes to deter speculators.

Property resold within six months of purchase can draw a tax as high as 15% of the entire transaction price. The curbs announced Sept. 14 will hit Hong Kong property stocks this week after they initially surged based on the Fed's move.

Financial Secretary John Tsang warned on Sept. 14 that if retail sales continued to slump and exports remained weak, Hong Kong would enter recession in the third quarter.

Tsang said the HKMA's moves would not affect first-time home buyers but sought to minimize risks. He explained they were in response to moves by the Fed on Sept. 13 ". . . that were more aggressive than we expected."

Hong Kong has already been attempting to contain widespread and out of control home-price growth, stamp out speculation and maintain the stability of its shaky banking system.

Because it’s one of the world's most open economies, Hong Kong has a property market quite easy to invest in. This advantage, however, makes Hong Kong a popular destination for "hot money" when liquidity floods the world economy, as is the case with the Fed's action that is also described as "Quantitative Easing 3" or QE3.

HKMA chief Norman Chan said the chance of overheating the asset market in Hong Kong is escalating because of QE3 and as the risks of the Euro debt crisis calm down. He said HKMA will introduce suitable measures at the appropriate time.

"The risk of an overheating property market also suggests a potential asset bubble," Chan pointed out.

In response to QE3, shares of Midland Holdings, the largest listed property brokerage in Hong Kong, jumped by 11% in trading on Sept. 14, indicating investors expect transactions in the secondary market for homes that are not new to improve as the result of cash flooding into Hong Kong.

All Hong Kong property stocks gained ground on Sept. 14 after the Fed action. Midland rose 3.16% while Hang Seng Properties increased by 3.3%.

The Fed launched another aggressive stimulus programme on Sept. 13, saying it would buy US$40 billion of mortgage-backed debt each month until the US jobs outlook improved substantially, but as long as inflation remained contained.