Hong Kong: Monetary Statistics For December 201031 January, 2011, 17:37. Posted by Zarathustra
Tags: Economy, Hong Kong, Hong Kong Money Supply, Money Supply
Latest figures from the Hong Kong Monetary Authority suggested that money supply in Hong Kong continued to dropped on a month-on-month basis, while still higher than a year ago. M1 Money Supply fell 2.8% after dropping 13.3% in November, while M2 dropped 0.2% after falling 6.6% in November, though they are 8.8% and 7.8% higher than a year ago respectively.
The reason I am looking at these numbers so closely is, of course, that money supply is now a pretty crucial factor in driving Hong Kong property prices.
Source: Hong Kong Monetary Authority, Centaline
There is very little surprise that the growth in money supply is trending downward after strong growth in 2009 and in early 2010 as financial crisis tightened up liquidity in late 2008, and strong growth in 2009 could be attributed to the first round of quantitative easing taking its effect. What is surprising though is that after the second round of quantitative easing announced back in November, money supply did not rise, but fell instead.
Let’s keep things into perspective. Because of the currency peg of Hong Kong dollar with the US dollar, the Hong Kong Monetary Authority has essentially given up their monetary policy tools and let it be controlled by the Federal Reserve. However, given the closer ties between China and Hong Kong now, there is no reason why the money supply conditions in Hong Kong are only affected by what the Fed is doing. We have of course heard enough about Chinese buyers scooping up properties in Hong Kong, so that’s an evidence that money can be coming from everywhere, including China. Two opposite forces are in play when it comes to money coming from China, namely, Chinese Yuan (Renminbi) appreciation and monetary tightening. Yuan appreciation will be positive for Hong Kong money supply growth as assets in Hong Kong will look cheaper, attracting more buyers, but only to a certain point. As currency appreciation is just another tool of monetary tightening in addition to interest rate hikes and raising reserve requirement ratio, there will come a point that the China economy will slow down, and by that time cash will stop flowing into the city. At this moment, we all know that China is tightening monetary policy, and liquidity has been squeezed of late. The fear of tightening has also triggered fund out-flow from emerging markets, which may have its part to play here.
No one knows for sure when that point will come, but two months of decline in money supply should at least make you feel cautious. Of course, as Chinese New Year is approaching, I shall wish you all the best for the year of Rabbit.
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