Buckle Up!

November 10, 2010

Under the watchful eyes of the whole world, the Federal Reserve has started the second wave of quantitative easing (QE2) in an effort to bail out the US economy, which does not seem to have improved as expected after the first round of QE. Whether QE2 will have sufficient impact on the US economy remains to be seen, but it has already caused uneasiness in this part of the world. Asia, being the least affected by the financial crash in 2008, has been enjoying a relatively steady recovery since then, as most Asian economies (except Japan) have had healthy growth in last two years. Surplus capital pumped by the Federal Reserve into the economy will have profound effects on other countries, notably the fast developing China and the more established economies such as Hong Kong and Singapore, as these are the destinations of much of the hot money.

In search of better returns, the hot money will flow into Asian asset markets. Hong Kong being one of the best investment markets will definitely receive its fair share of this capital surge. People are already predicting the stock market and property market to be more buoyant. This may benefit the markets in the near term, as asset value appreciation will bring about optimism which spurs further investments. However, the inevitable inflation and the subsequent asset bubble give headache to all the governments. In order to nib the bubble in the bud, Hong Kong Monetary Authority and the government have tightened up lending policies by introducing a series of measures to dampen demand. These include the lowering of mortgage ceiling, hiking of stamp duty on luxury property transactions, removing property investment as one of the eligible investments under Capital Investment Immigration Scheme, and proactively conducting land auction sales to increase supply. Local banks have recently followed suit by increasing mortgage rates and imposing more stringent scrutiny on mortgage applicants.

Since early 2009 Hong Kong has seen its property value swollen by 50%, with luxury property leading the charge. Despite the cooling measures, the market sentiments remain bullish. Investors are banking on the hot money effect and the fact that residential property supply will not see any appreciable increase until perhaps three years from now, as it takes time to build from bare land. With interest rate hovering at historical low level, money will find its way into the asset markets. Local stock market and property market will benefit from this expanded flow of capital. It is predictable that asset values will continue to inflate until the bubble bursts or the hot money is withdrawn.

So the stage is set for a war. Hot money will keep pouring in, and investors won’t miss this golden opportunity to jump on the bandwagon, thus further fueling asset value inflation. The government will do whatever they can to take the heat out of the markets and to maintain a stable environment. Who will emerge as a winner remains to be seen, but one thing is for sure: it is a bumpy ride ahead. Buckle up!

By Koh Keng-shing