More ef­forts are needed to en­sure SAR’s fi­nan­cial sta­bil­ity

China Daily (Hong Kong) - - COMMENT - PETER LIANG

There are good reasons for Hong Kong to feel con­fi­dent about the sta­bil­ity of its fi­nan­cial sys­tem with the linked ex­change rate mech­a­nism backed by a pru­dent fis­cal pol­icy and more than am­ple reserves. But fi­nan­cial sta­bil­ity can be dis­rupted by up­heavals in the cap­i­tal mar­ket and wide swings in as­set val­ues. The lat­est melt­down that wiped out the val­ues of many stocks listed in the Growth En­ter­prise Mar­ket, or GEM, has shown up the fragility of a reg­u­la­tory en­vi­ron­ment once held up to be a shin­ing ex­am­ple. Of even greater con­cern is the seem­ing help­less­ness of the gov­ern­ment and the de facto cen­tral bank in de­flat­ing the prop­erty mar­ket bub­ble be­fore it bursts.

The in­tegrity of the reg­u­la­tory en­vi­ron­ment is widely con­sid­ered to be a key fac­tor in en­abling the cap­i­tal mar­kets to at­tract sta­ble long-term in­vest­ment from over­seas in­vestors. The pres­ence of these funds has given Hong Kong a dis­tinct ad­van­tage over its re­gional com­peti­tors in en­tic­ing the list­ings of en­ter­prises from the Chi­nese main­land and else­where.

Al­though the real ben­e­fits of all these new stock list­ings are never as­cer­tained, Hong Kong has al­ways taken pride in be­ing an IPO cap­i­tal of the world. Such an ac­co­lade seems to be taken as an af­fir­ma­tion of its sta­tus as the re­gion’s premier fi­nan­cial cen­ter. But in the last de­ba­cle, what has be­come known as the “penny stock blood­bath”, has raised nag­ging doubts about the in­tegrity of the cap­i­tal mar­kets. Al­though the fall­out is lim­ited only to the GEM board and af­fected mostly over­seas in­vestors, mainly on the main­land, it is com­monly be­lieved that the al­leged tram­pling on the mar­ket rules should never have been al­lowed to hap­pen at all.

The Stock Ex­change of Hong Kong, HKEx, which owns the gov­ern­ment-granted mo­nop­oly, has said it would in­ves­ti­gate the mat­ter. It is hard to imag­ine that the al­leged abuses in the GEM could have gone un­no­ticed for so long with­out rais­ing the sus­pi­cions of the au­thor­i­ties.

It has been widely re­ported that the crash in prices of some stocks listed on the GEM was touched off re­cently by a false no­tice from a main­land stock bro­ker­age firm, which said Hong Kong au­thor­i­ties had or­dered the delist­ing of the so-called “zom­bie” stocks. The re­port was quickly with­drawn. But it stressed out many spec­u­la­tors, kick­ing off a stam­pede to sell.

Long be­fore the sell-off, mar­ket ob­servers had al­luded to ram­pant abuses on the GEM, in­clud­ing cor­po­rate dis­clo­sure ir­reg­u­lar­i­ties and stock price ma­nip­u­la­tions. In­deed, many Hong Kong in­vestors have learned to avoid this seg­ment of the mar­ket. But this is not a good ex­cuse for the stock ex­change and watch­dog agency to be do­ing noth-

Hong Kong needs more than the fixed cur­rency regime and solid bank bal­ance sheets to as­sure its fi­nan­cial sta­bil­ity.

ing for so long.

In con­trast, the gov­ern­ment has been mak­ing great ef­forts to re­solve the hous­ing prob­lem af­fect­ing the liveli­hood of many Hong Kong fam­i­lies. But even the threat of ris­ing bor­row­ing costs has had lit­tle im­pact on damp­en­ing the surge in home prices.

Prop­erty mar­ket an­a­lysts said that the great prop­erty rush has been driven by the pub­lic’s lack of con­fi­dence in gov­ern­ment’s ef­forts to in­crease the sup­ply of homes. They seem to have even less con­fi­dence in the gov­ern­ment’s low-cost hous­ing pro­gram. De­spite warn­ings about the burst­ing of the prop­erty bub­ble, devel­op­ers have tried to keep the mar­ket on the boil with easy credit in con­tra­ven­tion of the Hong Kong Mone­tary Au­thor­ity’s strict guide­lines to banks. The burst­ing of the prop­erty bub­ble would no doubt make hous­ing more af­ford­able. But it would also wipe out a large part of the house­hold wealth of many fam­i­lies who bought homes in re­cent years. What is more, the fall­out from the prop­erty price crash could pose a threat to the bank­ing sys­tem and fur­ther un­der­mine pub­lic con­fi­dence in the es­tab­lish­ment.

For­tu­nately for Hong Kong, the pub­lic’s anx­i­ety seems to have sub­sided since new Chief Ex­ec­u­tive Car­rie Lam Cheng Yuet-ngor re­stored some con­fi­dence by in­di­cat­ing she will en­cour­age greater pub­lic par­tic­i­pa­tion in ad­dress­ing the hous­ing is­sue which has be­come a ma­jor source of so­cial dis­con­tent. De­mand for new homes has eased while prices are show­ing signs of lev­el­ing off.

Prop­erty an­a­lysts at banks and other fi­nan­cial in­sti­tu­tions are pre­dict­ing a de­cline of av­er­age hous­ing prices as early as this month. That could be the be­gin­ning of the long process of de­flat­ing the prop­erty bub­ble, al­low­ing prices to ad­just grad­u­ally in a nor­mal down­ward cy­cle un­fet­tered by ex­ces­sive anx­i­eties from buy­ers.

Hong Kong needs more than the fixed cur­rency regime and solid bank bal­ance sheets to as­sure its fi­nan­cial sta­bil­ity. The gov­ern­ment has made a good start in re­duc­ing the threat posed by a prop­erty bub­ble. It must also ad­dress the cap­i­tal mar­ket’s short­com­ings to pre­serve the rep­u­ta­tion of Hong Kong as an in­ter­na­tional fi­nan­cial cen­ter.

The au­thor is a vet­eran cur­rent af­fairs com­men­ta­tor.

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