HONG KONG: Hong Kong's biggest bank, HSBC, has forecast that economic growth in the city could reach 3.8 percent in 2010, a big improvement from an estimated contraction of 3.6 percent in 2009, thanks to the ongoing recovery in domestic consumption and business activities.

According to the report released on Friday, Hong Kong's biggest bank also expects ultra-low interest rates, capital inflows and US dollar weakness are likely to trigger inflation, especially asset price inflation, in Hong Kong.

The bank has raised the forecast inflation rate in 2010 to 2.7 percent from the initially expected 2.3 percent.

Janus Chan, economics analyst at HSBC, said foreign capital inflow into Hong Kong will continue to boost local equity and real estate markets this year, while the positive wealth effect may also increase consumer spending in the city.

"Loose monetary policy in the global economy is unlikely to reverse anytime soon; the influx of capital into Hong Kong will continue to benefit local asset markets," Chan said.

HSBC sees the recovery in domestic demand in Hong Kong as likely to be sustained into 2010, thanks to the continuous improvement in local private consumption.

"Private consumption has risen for two quarters in a row, while private investment started to pick up in the third quarter of 2009. This bounce in investment, together with strong purchasing managers' index (PMI) figures in recent months, suggests that business confidence is now beginning to rise," HSBC's Chan said.

HSBC released the PMI on Wednesday, saying that business activities continued to rise in December for a fifth consecutive month, but at a slightly slower rate compared to November.

The bank also expects expansion in business investment to feed into the local labor market in 2010, as a number of government projects launching in 2010 may give a boost to the employment rate in Hong Kong.

"We expect the jobless rate to peak at a lower rate of 5.6 percent in the first quarter of 2010, against our previous 6.2 percent estimate," Chan said.

HSBC also maintains its positive estimate for export growth in Hong Kong in 2010, as various economic data suggest that the developed world is improving and that this will eventually stimulate external demand.

Last month, the International Monetary Fund (IMF) forecasted the economy in Hong Kong would grow 5 percent in 2010, with slight inflation of 0.5 percent.

As for the mainland, the bank is looking for 9.5 percent GDP growth there, with a moderate inflation rate of 2.6 percent in 2010.

Qu Hongbin, HSBC's chief economist for China, said economic recovery on the mainland has been consolidated, with industrial production growth accelerating to pre-crisis levels, real estate investment picking up and much better-than-expected consumer spending emerging.

"If exports pick up more strongly than expected, GDP growth could exceed 10 percent, raising the risk of inflation, especially considering the excessive credit growth of 2009 and rising commodity prices," Qu said.

(HK Edition 01/09/2010 page2)