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US Federal Reserve chairman Ben Bernanke recently disclosed his timetable for the withdrawal of quantitative easing, leading to speculation that the US may tighten liquidity by raising interest rates. The news saw share prices around the world dropping sharply on a “Black Monday” for investors.
The US began its quantitative easing programme in the aftermath of the 2008 global financial crisis. As a result of worldwide monetary easing, huge amounts of capital have been flowing into China and Hong Kong to take advantage of higher yields and the appreciation of the renminbi. This “hot money” has posed challenges to Hong Kong’s open economy in terms of higher inflation and a property price bubble. Some property prices have, for example, more than doubled in the past four years, due in part to ultra-low interest rates. To deal with rising inflation and the risk of an asset bubble, the Hong Kong government has implemented a series of policies including the introduction and adjustment of the minimum wage and new taxes to dampen the real estate market.
Debate over the merits or otherwise of the new taxes for properties has been the most intense, particularly as the double stamp duty on sales applies to all property transactions other than those by first-time buyers. The new measures have had a big impact on transaction volumes, but little effect on curbing prices or addressing the chronic shortage of residential, commercial and industrial properties.
Now, along with the Fed’s announcement on phasing out stimulus spending, China has also signalled that it will tighten its credit market. Hence, Hong Kong could see an exodus of hot money as well as interest rate rises. Amid thin transaction volumes, the property market may have reached a turning point. As Financial Secretary John Tsang Chun-wah said, interest rates in Hong Kong may rise even before those in the US. In the light of market changes, the government may have to step in and adjust some policies.
Furthermore, a possible rate rise in the US and Hong Kong would make it more difficult for Hong Kong’s small and medium-sized enterprises to grow amid falling export orders and the rising costs of labour and materials. This is because banks will tighten lending as their own borrowing costs are rising, quickly translating into higher borrowing costs for the companies in need of financing.
Given that the SMEs are an important pillar of the economy and employment in Hong Kong – with about half of the total workforce in Hong Kong employed in them – the government must monitor the business and financing environments for SMEs closely, and respond when required.