Hong Kong’s “rapid” credit growth has increased the risk that banks make bad loans as the city faces a potential recession if the European crisis deepens, the IMF said.
“Credit has been growing at an extraordinary pace, particularly for loans in foreign currency,” the IMF said in a report released yesterday.
Such growth may “lead to a worsening of average credit quality” and create “strains on bank funding,” it said.
The US Federal Reserve’s pledge to keep borrowing costs at near zero through at least mid-2013 and credit tightening in China have spurred loan demand from Chinese companies in Hong Kong, where a currency peg means the city’s interest rates track those in the US.
Hong Kong Chief Executive Donald Tsang (曾蔭權) said last week that there was a 50 percent chance the global economy would shrink next year and Hong Kong may see “a couple of quarters of bad times” as Europe’s debt crisis roiled markets.
While the development of offshore yuan business is “positive” for the city, growing deposits in the Chinese currency could intensify competition for deposits in other currencies that result in higher funding costs, the IMF said.
China needs to raise the convertibility of its capital account to encourage yuan repatriation as the offshore market continues to grow, it said.
The IMF expects Hong Kong’s economy will slow to 4 percent next year, down from 5.75 percent this year, on weaker export demand.
Should the European crisis worsen and bring a “sudden downside shock” that cuts global growth by 3 percentage points, the city will fall into recession and the city government should prepare to adopt immediate fiscal stimulus such as tax reductions, the fund said.
Hong Kong will take “appropriate measures” to stabilize its monetary and banking systems if necessary, Hong Kong Monetary Authority chief executive officer Norman Chan (陳德霖) said in a statement in response to the IMF’s report.
Hong Kong Financial Secretary John Tsang (曾俊華) said the city will act “against any possible adverse events.”
Hong Kong skirted a recession in the third quarter, when the economy expanded 0.1 percent from the previous three months, government data showed last week. Low unemployment and increasing numbers of Chinese tourists boosted consumption even as Europe’s crisis crimped exports.
“Domestic growth is quite strong, the economy appears to be operating above potential,” Nigel Chalk, the IMF’s Washington-based China mission chief, said yesterday via a video teleconference.
“From a macroeconomic perspective, you don’t see the need for universal transfers” to households via one-off measures including cash handouts and such temporary policies could be discontinued in the upcoming budget, he said.
Besides weakness in global trade, Hong Kong is grappling with elevated inflation and the risk of a slumping housing market. Consumer-price growth will ease to a range of 4 percent to 5 percent next year on slowdown in global economy and food price gains -imported from China, the IMF said.
There are signs that the city’s property market might cool, while it’s still early to determine if such a slowdown will persist, the IMF said.
The government’s reintroduction of a government-subsidized home plan is appropriate to lessen the social burden on renters and new households that do not yet own a home, according to the report.
Rising property and inflation have led to criticism of the city’s linked exchange rate system, which Hong Kong has maintained since 1983.
Proposals to change the peg are “ill-conceived” as that would sacrifice the city’s monetary and financial stability, the IMF said.
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