Hong Kong Regulator Predicts Ongoing Credit Crunch In 2008

by Mary Swire, Tax-News.com, Hong Kong

03 January 2008

The Chief Executive of the Hong Kong Monetary Authority, Joseph Yam, has warned investors that the ongoing fall-out from the US sub-prime mortgage crisis, coupled with economic developments in mainland China, could continue to result in turbulent markets this year.

"Quite clearly, the sub-prime crisis that originated in the US will still be on the radar screen," Yam wrote in a recent 'Viewpoint' column for the HKMA website, which cast an eye on the prospects for Hong Kong's financial markets in 2008.

"With credit availability continuing to be a problem, despite successive cuts in interest rates, economic performance in the US generally and its housing market in particular are likely to be adversely affected in the months to come. At a time when financial institutions are still under continuing pressure for the re-intermediation of the large stock of doubtful assets (the sub-prime-related securities) still in the market, they may face an unusually large flow of such assets. This may put continuing pressure on their profitability and prolong the tightness in the money market," he observed.

Yam stated that an industry-led solution to these problems would be the best way to restore some normality back to the markets, but suggested that this was unlikely to be forthcoming.

"There seems to be considerable reluctance in the official sector (financial or otherwise) to get involved in working out such a solution, understandably given the moral-hazard concerns," he observed. "Private-sector initiatives are either institution-specific or not comprehensive enough to achieve the necessary tranquillizing effect on the money market and the availability of credit."

He warned however, that "as the matter drags on, the risks to the economy may persist and possibly intensify".

"As new information on how the sub-prime crisis is developing – hits on profits, capital injections and restructuring, monetary policy actions and so on – becomes available, the nervous financial markets will react to it, and volatility will continue to be a rather inevitable feature of global financial markets in 2008," he forecast.

Closer to home, Yam also noted that economic policy developments in Mainland China bear "close watching", and cautioned that "an unusually potent scenario" could produce sharp market movements in response to policy shifts or stresses built up in the system.

"While in the socialist market economy of the Mainland there could be effective administrative remedies to limit damage and maintain monetary and financial stability, how events will play out in the capitalist, free-market economy of Hong Kong will be more unpredictable and the remedies may be fewer," he wrote.

"The performance of our financial markets will, to a significant extent, continue to reflect developments on the Mainland, particularly in areas such as the international mobility of capital and the reform of the capital markets," the HKMA chief concluded.

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