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IMF concerned about Hong Kong asset price inflation

HONG KONG: The International Monetary Fund said on Nov 3 it shares Hong Kong's concern that the city may face sharp asset price inflation and encouraged the government to look at increasing land supply for property development.

"We share the authorities' concerns that a credit-asset price cycle could take hold, leading to a sharp run-up in prices for certain real and financial assets," the International Monetary Fund said in an annual report on Hong Kong.

"While such asset price movements are part of the natural equilibrating mechanism of the Hong Kong economy, there is a risk that prices could become driven more by short-term liquidity conditions, divorced from fundamental forces of supply and demand."

The Washington-based organisation also said it had raised its GDP forecasts for Hong Kong following a recent improvement in the economy. It forecasts a 2% decline in GDP this year, against a 3.5% decline previously, and 5% GDP growth in 2010, up from 3.5% previously.

Hong Kong chief executive Donald Tsang warned last month of the risk of a property bubble and said the government could release more land for residential property development.

"We welcome the consideration that is now being given to increasing the supply of land to the market as one of the possible means to help moderate potential property price surges," the IMF said.

Property prices have surged by 28% overall this year, and price increases for luxury property have topped 40%, as wealthy mainland Chinese have snapped up luxury apartments. Last month, a luxury flat sold for a world record HK$71,280 (RM31,422) per sq ft.

That prompted the central bank, the Hong Kong Monetary Authority, to raise the downpayment to buy luxury property and cap mortgage loans for mass-market property.

The territory's currency peg to the US dollar is helping boost fund inflows as a weak dollar makes Hong Kong assets attractive while the peg forces Hong Kong to track moves in US interest rates, which are expected to stay low for some time.

The IMF backed continuation of the peg, saying it was a proven anchor of monetary and financial stability.

"The Hong Kong dollar continues to be valued broadly in line with economic fundamentals and price flexibility -- in goods, factor and asset markets -- has acted as a vital mechanism for the real exchange rate to adjust to the recent large external shocks," it said.

A flood of fund inflows this year has pushed the Hong Kong dollar to the top of its trading band, forcing the HKMA to repeatedly intervene to keep the currency within its band.

The IMF said that would reverse when expansionary monetary conditions eventually are unwound, potentially creating turbulence in the currency or money markets. The Hong Kong dollar will shift to the bottom of its trading band, forcing the HKMA to intervene on the downside to keep the band intact, it said. – Reuters

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