In his latest 'Viewpoint' column for the Hong Kong Monetary Authority, Joseph Yam, HKMA Chief Executive, observed, not for the first time, that there are a lot of uncertainties confronting Hong Kong's economy and financial markets, particularly the economic and financial outlook for the Mainland and the US.

The American sub-prime crisis persists, and tight credit conditions are threatening to slow down the US economy and lead to further downward pressure on property prices, he stated. The possibility of a recession in the US cannot be ruled out, he added.

Moreover, he noted that while the mainland Chinese economy continues to grow at a fast pace, the macro monetary conditions are causing considerable concern. Inflation has been climbing to uncomfortable levels, requiring interest rates to be raised to contain it, but at the same time attracting more capital inflows.

"With plans to encourage the orderly outflow of capital by allowing residents to invest outside the Mainland not yet implemented, and domestic savings continuing to accumulate, the imbalance in the supply of and demand for financial instruments other than bank deposits persists, leading to prices being much higher than would otherwise be the case, and causing concerns about the possibility of a stock-market bubble," he wrote.

"It is not clear how this scenario might develop. The inevitable market adjustment, if sharp and destabilising, would have serious implications for monetary and financial stability, not just for the Mainland but also for others, including of course Hong Kong," Yam warned.

The HKMA chief said that developments in both jurisdictions in the next few months will be crucial.

"On the Mainland there is hope for more concerted and effective macro-economic adjustment measures now that the Party Congress is over. But there are structural issues in the financial system that will need to be addressed to make it conducive to promoting sustainable economic expansion," he wrote.

"Against this complex background we in Hong Kong have to be cautious about our short-term economic prospects despite the different and bullish signals our financial markets are sending us. Perhaps there are factors that I have failed to see. Irrational exuberance or not, investors should act with caution," he urged.

Speaking in the Legislative Council on Friday, Financial Secretary John Tsang echoed Yam's concerns, observing that although Hong Kong's economic performance has fared well, the prevailing risks and uncertainties cannot be taken lightly.

"While the credit market turmoil in Europe and the US triggered by sub-prime mortgage problems has eased, and the Hong Kong economy is relatively unscathed so far, the global credit markets have yet to return to normal and the impact of the turbulence on the external economic environment has yet to fully emerge," he stated.

"We will have to pay attention to the second, or even the third round effect on the Hong Kong market. On top of this the huge volume of yen carry trade is another potential threat to global financial markets, an area which warrants close attention," he added.

Tsang suggested that the global trade imbalances caused by the persistently large current account deficits of the US economy have yet to be redressed. If the unwinding of the global imbalances turn out to be sharp and disorderly, this could be destabilising to the global economy and international financial markets, he warned.

"Protectionist sentiment primarily out of political considerations is apparently rising in some regions. This, coupled with the slow progress of multilateral trade talks, has added to the uncertainties facing the external trade environment," the Financial Secretary told lawmakers.

Tsang also thought that Hong Kong has to keep a close watch over its inflation situation. "We have to guard against the risk of Hong Kong falling back into the vicious cycle of cost-price inflation spiral, as it would impede Hong Kong's sustainable economic development," he concluded.