HONG KONG: In its annual report on Hong Kong released yesterday, the International Monetary Fund (IMF) said Hong Kong should consider tightening bank lending, in order to curb rapid asset price inflation which is damaging the city's economic conditions.

The Washington-based organization said strong capital inflows and the resultant large liquidity overhang in the financial system could potentially lead to overly rapid credit growth, fueling asset markets and creating macroeconomic volatility in the city.

"Strict enforcement of the existing regulatory regime would be essential, while countervailing prudential measures could play a role in mitigating the credit-asset price cycle," the IMF said.

Money flooding into Hong Kong has boosted mass residential property and luxury property prices to levels 30 percent and 40 percent higher over the past year, respectively, while the benchmark Hang Seng Index has leaped more than 55 percent.

Responding to the recent surge in property prices and misleading sales tactics by property developers, the SAR government last month unveiled several new measures to tighten rules on marketing first-hand residential properties.

The Hong Kong Monetary Authority (HKMA) has also reduced the mortgage ratio of luxury properties priced at or more than HK$20 million to 60 from 70 percent, while limiting the maximum loan amount for residential property valued under HK$20 million to HK$12 million.

To further ease asset-price gains, the IMF suggested the SAR government tighten bank lending and the criteria for mortgage insurance.

"The authorities could explore lowering the existing maximum debt servicing ratio for mortgages (which is currently set at between 50 and 60 percent) based upon the nature and size of the underlying loan," it said.

The organization also advised the city's monetary authorities to maintain clear communication of policy actions, when liquidity conditions and pressures on the currency eventually reverse.

Daniel Chan, senior investment strategist at DBS Bank, said loose monetary policies have lowered interest rates in Hong Kong, which has benefited the city's investment activities.

"The government has to remain cautious, as capital outflow may damage private investment activities in Hong Kong," Chan said.

Hong Kong's currency peg to the US dollar has boosted the flow of funds into the local asset markets, as the weakening US dollar makes the city's assets particularly attractive.

Despite the strong capital inflow, the IMF is maintaining its support of the peg, saying that the system has served as "an anchor of monetary and financial stability".

"We welcome the IMF's continued support of the Linked Exchange Rate system," Hong Kong Monetary Authority chief executive Norman Chan said yesterday. He added that the city's de facto central back will remain firmly committed to the currency peg, which has been well established since 1983.

The IMF also said economic recovery is now under way in Hong Kong, fueled by supportive government policies, growth on the mainland, and accommodative monetary conditions imported from the US.

IMF expects the city's economy to grow 5 percent in 2010, with slight inflation of 0.5 percent.

Given that the economic recovery still remains "fragile", the IMF said the SAR government should maintain fiscal support in the upcoming 2010/11 budget, including spending on key infrastructure projects and social programs.

In response to the IMF report, Financial Secretary John Tsang said yesterday the government will continue to adopt necessary measures to sustain economic growth.

"The global economic outlook remains subject to considerable uncertainties. We are mindful of the prevailing risks in the external environment," Tsang said.

(HK Edition 12/04/2009 page1)