While speculative capital inflows into Asian markets such as Hong Kong are generally viewed as good news for asset prices, it may not be so simple.
The problem is that periods of speculative capital flows can be followed by a crash when a subsequent negative catalyst causes sudden outflows of capital, and Asia was hit by just such a situation back in 1997.
The IMF is warning of a ’97 sequel, whereby we see asset prices rise sharply only to see them collapse even more so.
It might be a fun ride for investors if not for the fact that sharp outflows can lead to a protracted economic downturn after wards.
Depending on the amplitude of the upswing, the resulting downturn could prove both protracted and painful,” the IMF said in a report today. The government should consider increasing stamp duties on housing and taxes on owners of higher-end properties if prices continue to rise, it said.
The local government assures us that it’s on top of the situation:
“We are fully aware of the risks of an acceleration of the credit-fuelled asset cycle,” Chan, of the Hong Kong Monetary Authority, said in a statement today. The central bank “will introduce appropriate and timely prudential supervisory measures to ensure banking stability,” he said.
The currency peg has served as a “robust anchor” to the economy, the IMF said. Still, prices in goods and the labour market could be driven down should there be “a move to a tightening bias in the United States or a slowdown in China,” it said.
While we probably aren’t there yet, it will pay to get scarce once the capital inflow party gets long in the tooth.
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