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Beijing: Hong Kong has property problem
New measures to cool prices now likely
There have been numerous warnings on the property market as prices surge past the bubble high of 1997, including one from the Hong Kong Monetary Authority (HKMA) that unsustainable lending practices posed a risk to Hong Kong’s wider financial system.
But now, an even louder voice has spoken, and one that could worry Donald Tsang
His ultimate political masters in Beijing now say there is problem, according to its top official in Hong Kong. The director of the State Council’s Hong Kong and Macau Affairs Office, Wang Guangya, has urged the government to act with urgency to deal with property and inflation issues or they would become a political problem.
That is significant for two reasons. Firstly, it gives the government political cover to move against the dominant interests of Hong Kong’s property tycoons, rather than stick to the largely cosmetic initiatives so far.
Secondly, the fact that Beijing is concerned about the livelihood issues of unaffordable property and inflation in Hong Kong might focus its leaders on some of the root causes of the problem. It is becoming increasingly apparent that Hong Kong’s colonial relic of the 24-year-old U.S. dollar peg is a source of asset and price inflation as the Hong Kong economy becomes more closely integrated with its giant mainland neighbor.
Hong Kong’s Basic Law granted 50 years of political independence after the 1997 handover. But it could not put a time limit on economic integration. This is being seen from how bank ATMs are now offering yuan as well as Hong Kong dollar notes, to last week’s announcement that IPOs will now come with the option to subscribe in either currency. Mainland Chinese shoppers are as important to Hong Kong’s retail trade as they are to Macau’s casinos.
The combination of this heightened mainland activity and a strengthening yuan is increasingly inflationary. As the yuan appreciates yet further against the Hong Kong dollar, imports from its largest trading partner become more expensive. The stronger yuan against the dollar also makes Hong Kong property seem cheaper for mainland buyers. In the first quarter of this year, some estimates put 40% of purchases from the mainland.
There are a myriad other factors driving property purchases by mainlanders in Hong Kong. It avoids new curbs on multiple home purchases in their local markets, as well as higher property and capital gains taxes there. It is also a way to get questionable funds offshore, something that was highlighted in the recent leaked People’s Bank of China report on corruption. These dynamics are reinforced as China allows the yuan to rise to combat its own inflation — rising over 5% this year against the Hong Kong dollar, on top of its 20% rise in the previous three years.
Some evidence suggests initiatives to develop yuan settlement in Hong Kong are also indirectly contributing to asset-price increases and inflation as the monetary base expands. A trebling of Hong Kong’s monetary base since 2009 has driven down interest rates to historic lows and fuelled mortgage lending.
One reason for the HKMA to feel uneasy about property is the sheer scale of leverage that now exists. Banks were carrying mortgage loans that stood at 43% of gross domestic product last year, which is even more than the 32% in Hong Kong’s property bubble year of 1997. The huge expansion in the monetary base will have disguised this, showing up in a spike in loan-to-deposit ratios.
Given the enormity of mainland Chinese influence today, perhaps Hong Kong cannot wait for 50 years before Beijing gets a bigger say in its economy, or for Hong Kong to have a say on how mainland policy impacts its economy. Apart from the thorny peg question, surely authorities need to agree on how to control mainland property buying in Hong Kong and unintended consequences of Beijing policy.
In the meantime, Hong Kong may well bring back the “Home Ownership Scheme” (HOS) subsidized housing that gives cheaper housing to low-income residents. Since 2007, local legislators have called seven times for the government to resume HOS with non-binding resolutions.
The risk, of course, is that the market has now reached such a delicate and overextended state, even well-intention policies will be full of risk. That should scare authorities in China, and not just Donald Tsang.
Beijing will not want to see Hong Kong’s position as an offshore finance hub for the mainland being threatened by a debt bubble. Nor will it want the experiment of “one country, two systems” to end in tears. If we look at bellwether property stocks Cheung Kong Holdings Ltd. and Sun Hung Kai Properties Ltd, that are 20% and over 40% off their recent highs, it suggests the market believes continued property-price rises are unsustainable.
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