Bloomberg News

IMF Says Worsening Crisis May Force Hong Kong to Back Banks

December 10, 2011

(Updates with remarks from Hong Kong chief executive in 6th paragraph.)

Dec. 9 (Bloomberg) -- Hong Kong may need to stand behind some banks and deposits should Europe’s sovereign debt crisis worsen and cause the global economy to slump, said Nigel Chalk, the International Monetary Fund’s China mission chief.

In a “very bad scenario” the government may have to “perhaps guarantee some of the deposits in the banking system as they did in 2008 in the wake of Lehman Brothers,” Chalk said in a Bloomberg Television interview from Washington. The fund sees a low probability of such a situation, it indicated in a report released today.

Hong Kong must be ready to provide “significant and immediate” fiscal stimulus that could include tax cuts, subsidies for the poor and rolling back some property curbs, the IMF report said. Recession is “possible” for the city on deteriorating exports and the government will ease property curbs in the event home prices slump, Financial Secretary John Tsang said this week.

“A bad situation in the global economy can very, very easily push” Hong Kong into recession again, Chalk said. “They’ve really got to keep their gunpowder dry, ready to react in case there is that need and as I said most of that reaction should be done from the fiscal side.”

Slower Growth

The IMF expects Hong Kong’s economic growth to slow to 4 percent in 2012, down from 5.75 percent this year, on weaker export demand, it said. The city “could end up with a growth rate of somewhere close to zero and maybe negative” in a global slump, Chalk said today.

Hong Kong narrowly dodged a recession in the third quarter with 0.1 percent growth from the previous three months, as low unemployment and tourists from China boosted consumption while Europe’s crisis dragged on exports. Chief Executive Donald Tsang, who predicted last month that growth may slow to 2 percent next year, said today he sees a “huge” downturn risk for the global economy.

“Looking ahead, we can’t be optimistic on Hong Kong’s economic outlook,” Tsang said.

The collapse of Lehman Brothers Holdings Inc. in 2008 prompted hundreds of Hong Kong investors to protest at possible losses on Lehman-linked investments, while Bank of East Asia Ltd. suffered a brief run on deposits at branches in the city.

Lehman Collapse

After the Lehman collapse, the Hong Kong Monetary Authority said it would use its foreign exchange reserves to guarantee bank deposits and the government announced a fund from which banks could access additional capital if needed, shoring up confidence in lenders after the run on Bank of East Asia.

While the city’s property market is clearly slowing, the outlook is “highly uncertain,” the IMF said. Hong Kong should reverse some tightening measures on residential property in the event of pressure from external shocks, it said.

Home prices dropped 3.5 percent from the peak in June, according to an index compiled by the Centaline Property Agency Ltd., the city’s largest closely held property broker. The value of home sales slumped 40 percent in November from a year earlier, according to the Land Registry.

The city pledged in October to build subsidized homes and ensure land supply for private housing, after it last year imposed higher charges on homes sold within two years of purchase and raised some down payments. Residential prices had surged 70 percent since the start of 2009 on low mortgage rates and an influx of mainland Chinese buyers.

Inflation, excluding distortions from government subsidies, accelerated to a record 6.4 percent in October. A rise in consumer prices has led some to call for changing the city’s 28- year-old currency peg to the U.S. dollar. The fixed exchange rate system “merits continued support” because it provides financial stability, the IMF said.

--Editors: Nicholas Wadhams, Paul Panckhurst

To contact the reporters on this story: Sophie Leung in Hong Kong at sleung59@bloomberg.net; Kevin Hamlin in Beijing at khamlin@bloomberg.net

To contact the editor responsible for this story: Paul Panckhurst at ppanckhurst@bloomberg.net


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