Hong Kong trapped in price spiral By Stephen Minas
HONG KONG - Horse races, share prices and property values - Hongkongers are
avid followers of all three, and it is the last one that has locals in this
city of about 7 million people increasingly worried.
Spiraling property prices have Hongkongers blaming Chinese speculators. They
may be just looking at one side of the coin. Near zero US interest rates have
inflated Hong Kong’s property market - and put the former British territory out
of step with the rest of China.
Home prices have almost doubled since the start of 2009. The surge is keeping
increasing numbers of Hongkongers out of home ownership and has fueled
government concerns that the property
market may be overheating with a collapse to follow.
Financial Secretary John Tsang Chun-wah has cautioned that Hong Kong faces "an
increased risk of a property bubble forming". Ip Kwok-him, a Housing Authority
member and legislator, worries that "the property market bubbles may burst any
time". Government measures to restrict speculation on housing, including
tightening on mortgage loans, have so far failed to stop prices increasing.
This is Hong Kong's immediate problem. But the surging property prices should
be noted far beyond the former British colony for what they reveal about the
world's two largest economies - the United States and China.
Tsang has singled out an influx of "hot money" from mainland China as a major
cause of the price surge. Mainland Chinese snapped up 19% of luxury flats sold
in Hong Kong last year. For some new developments, the figure is as high as
These buyers have been looking for higher and less volatile returns than they
can find in mainland China, where government-capped deposit rates that banks
can offer discourage people from keeping money in a bank.
The low rates are designed to funnel cheap credit to major firms, many
state-owned and many export-orientated. Peking University's Professor Michael
Pettis estimates that Chinese depositors subsidize favored borrowers like
state-owned firms to the tune of at least 5% of gross domestic product (GDP).
Increased inflation means that real interest rates are actually negative. The
announcement last Tuesday by the People's Bank of China (PBoC), the country's
central bank, to raise both lending and deposit interest rates by 0.25% does
not change the fundamentals of the situation. With the increases, the one-year
deposit rate now is 2.5%, still below the increase in inflation.
China's Consumer Price Index (CPI) rose 3.6% in September from a year earlier,
according to State Bureau of Statistics data released on Thursday, and CPI
increased 2.9% on average in the three quarters of this year from the same
period of 2009. The quarterly CPI figures for this year show the increase in
inflation is accelerating: to 3.5% in the third quarter, from 2.9% in the
second and 2.2% in the first. Depositors will continue to get negative interest
rates unless the PBoC raises deposit rates sharply.
So unattractive are the rates China's banks can offer that some bank branches
have been offering all manner of inducements - from paying school fees to
giving jobs to relatives - to attract depositors. Wealthy Chinese are looking
to park their money elsewhere.
The property market on the mainland, according to many, is already overheated.
"Like crabs in cold water" is how economist Andy Xie describes China's property
speculators. "They feel good, kicking their legs once in a while ... Little do
they know the heavy top has been lowered over their heads and a fire is lit
below." Xie tips property prices in China's big cities to fall by at least half
over the next five years. 
The Chinese government is also concerned, recently announcing new measures to
cool property prices such as restricting households from buying more than one
flat in a city. There are rumors that a property tax will soon be announced.
Add the continuing volatility of China's equities market and it is little
surprise that mainlanders are looking to invest further afield.
Hong Kong's property has been made even more attractive by the Capital
Investment Entrant Scheme, which grants residency rights to people who invest
HK$6.5 million (US$838,000) - lately increased to HK$10 million - or more in
the city. The right to live in Hong Kong is highly sought after by many
mainland Chinese, and there are few ways to get in.
But the "hot money" from China has come on top of a much bigger problem.
The US Federal Reserve continues to pursue a near-zero interest rate policy.
The Hong Kong dollar is pegged to the greenback, which means that Hong Kong
does not have an independent monetary policy - it has to follow Uncle Sam's.
This has resulted in interest rates at a two-decade low, meaning cheap credit
for homebuyers. What's more, as China's currency slowly rises against the
greenback, Hong Kong assets become cheaper for mainland investors.
Hongkongers are demanding action. Pro-Beijing legislator Ip Kwok-him reports on
"strong sentiments in the general community. Everyone is telling the government
he wants to buy his own home but can't afford it". Commentator Michael Chugani
puts the problem in stark terms: "To afford his rent, my neighbor had to settle
for a flat inferior to the one he had. I'm next. That's downward mobility, not
Hong Kong's eclectic political parties all want something done. The city's
chief executive, Donald Tsang, this month announced that property would be
"temporarily" removed from the investment residency scheme in deference to
"public concern". Tsang also announced some affordability measures.
Edward Yiu, assistant professor at the University of Hong Kong's real estate
and construction department, warns that without a positive real interest rate
"all other measures are just mitigating adverse consequences or buying time".
This, together with recently released figures, points to continuing price
A burst bubble would be of most concern to Hongkongers and speculators betting
on continued price increases. But the fact of the bubble has much wider
significance. It's an indicator of the central facts of today's world economy:
the weak US recovery and the China growth story.And Hong Kong is caught in
between, for better or worse.
At a time of Sino-US economic imbalance, Hong Kong's property market has been
inflated from both ends: rock-bottom US interest rates keep mortgages cheap,
thanks to the dollar peg; and Chinese money, fleeing a domestic banking system
that effectively subsidizes state-owned borrowers, has bid prices upward. Hong
Kong has been simultaneously at the mercy of American and Chinese monetary
Hong Kong markets itself as "Asia's world city". Evidence of an unbalanced
world economy can be seen in the windows of its real estate agencies.
1. Rumors on the PBoC deregulating Chinese bank deposit rates, Credit
Writedowns, Sep 22, 2010.
2. Chinese Real-Estate Bust Is Morphing Into a Slow Leak, Bloomberg, Sep 27,
Stephen Minas, a journalist, has written widely on Chinese affairs. Minas
completed a master's in international relations at the London School of
Economics in 2009. On Twitter@StephenMinas