HK budget to target inflation, property boom

HONG KONG: Hong Kong's coming budget is expected to offer short-term handouts to residents to soften the sting of rapidly rising prices, and further moves to try to cool the booming property market.

The budget for the fiscal year beginning April 1, which Financial Secretary John Tsang will present to lawmakers on Wednesday, Feb 23, comes as Hong Kong enjoys strong growth.

For the third quarter of 2010, the last reported period, the economy grew 6.8% from a year earlier, and the current fiscal year — previously expected to produce a deficit — instead is likely to produce a substantial surplus.

But it is inflation that is expected to be foremost in Tsang's mind.

Inflation is not as sharp as in mainland China, where it accelerated to 4.9% in the year to January. But Hong Kong's consumer price index for December rose 3.1% from a year earlier, pinching lower-income residents and aggravating the affluent financial centre's wage gap, already one of the worst in Asia.

Over the past year, the sharpest contributor to increases in living costs over the past year has been booming real estate prices in the land-starved city.

While measures including higher duties on luxury flat purchases have been imposed, analysts expect the new budget to include further steps such as boosting land supply and tightening down-payment requirements in a bid to take steam out of the market.

Although authorities slapped heavier stamp duties on luxury property transactions in November, smothering a degree of speculation, Hong Kong housing remains the world's most costly, according to a January survey by Savills.

It said negative real interest rates and ample liquidity were spurring demand, corroding Hong Kong's regional competitiveness as a business hub.

Analysts say it is important for the government to move to contain the boom with multiple steps such as making more land available to developers.

"Those are the right moves... because those address long-term structural issues rather than near-term," said Standard Chartered Bank economist Kelvin Lau.

But others remain sceptical much more can be done.

One headache for the Hong Kong authorities has been a flood of hot money pouring in from mainland China and elsewhere.

Given the city's growing role as an offshore yuan hub, investors are seeking to capitalise on China's liberalising financial system and a rising yuan, exacerbating the risks of asset and property market bubbles.

"Hong Kong's government has its hands tied on property. If interest rates remain as low as they are right now, I don't think any government is capable of doing anything to slow the rise in real estate prices and curb speculation," said Jennifer Wong, a tax partner at accounting firm KPMG.

A survey by CPA Australia among more than 400 finance professionals and senior accountants found that 72% backed a capital gains tax on second investment properties within two years of purchase, to discourage speculative buying often blamed on a flood of cash-rich mainland Chinese investors.

Tsang could signal fresh offshore yuan market initiatives and investment products as the market continues to boom. Standard Chartered Plc expects Hong Kong's yuan deposits to grow exponentially from 280 billion yuan (RM129.92 billion) now to 4.5 trillion yuan by 2015.

It's highly unlikely, though, any type of capital controls will be imposed, given Hong Kong's track record as one of the world's freest economies.

The government is not expected to change the city's low tax regime, which offers a top corporate tax rate of just 16.5% and a top income tax rate of 15%.

The Singapore government said in its budget last week that it will reduce taxes for middle- and upper middle-income taxpayers from next year. Singapore, with an eye on elections expected soon, also announced a series of handouts to poorer citizens.

Hong Kong also is likely to unveil short-term relief measures to help people cope with higher costs.

Analysts say these could include one-off measures to help the less well-off,including rent waivers for public housing, tax exemptions, electricity rebates and greater social welfare.

"We do not expect the government to make full use of its ammo by cutting taxes or raising spending more permanently," said Kevin Lai of Daiwa Capital Markets, who forecast a surplus for the current fiscal year of HK$78 billion (RM30.56 billion), a sharp turnaround from the government's expected HK$25.2 billion deficit.

Other analysts see a surplus ranging from HK$60 billion-HK$80 billion.

Despite Hong Kong's economy growing increasingly intertwined with China's and its key role as a yuan centre, analysts say Tsang will almost certainly reiterate Hong Kong's decades-long commitment to its pegged exchange rate with the US dollar as a pillar of market stability. — Reuters