Norman T L Chan: The risk of asset-price bubbles Speech by Mr Norman TL Chan, Chief Executive of the Hong Kong Monetary Authority, at the Hong Kong Economic Summit, Hong Kong, 14 December 2009. *  *  *  Introduction 1. I am very honoured to have this opportunity to speak to you today at the Hong Kong Economic Summit. Potential risks of an asset bubble 2. Recently, many people in Hong Kong have become concerned about the emergence of an asset-price bubble. As we all know, interest rates are now very low due to the extremely loose monetary policies around the world. Attracted by a promising outlook for economic recovery, large amounts of funds have flowed into Asia, including Hong Kong. From October last year up to now, more than $ billion have flowed into the Hong Kong dollar. This will certainly exert an upward pressure on local asset markets. I am sure you are all aware that the Hong Kong asset markets have become very active again. In particular, the prices of residential properties rose for 10 consecutive months from the beginning of this year, and prices and turnover have returned to levels we saw before the financial crisis. Many people are asking whether there is already a bubble. 3. Bull markets normally occur in times of rapid economic growth, abundant liquidity and strong investment sentiment. However, as to how far a bull market can develop before it becomes a bubble, there is no easy answer.
I agree that this would be the case if all property buyers used their savings and did not need to borrow from banks. However, I do not believe that none of the purchasers of luxury properties borrow from banks. Some buyers do not approach banks for mortgages because they still have time before completing the transactions, or because they do not intend to hold the flats for a long time. I also do not believe that the markets for small and medium-sized residential flats could have become so active without abundant credit from banks. I therefore believe that the prudential measures that we have taken and good risk management by banks will help stop asset-price bubbles from forming. 10. While banks will help to control the risks, members of the public and corporations in Hong Kong also need to be more alert. They should consider what they can afford and not borrow too much at a time when interest rates are so low to avoid getting into financial difficulties when interest rates rise again. But I can see that this is not easy. As hot money continues to flow into Hong Kong, it pushes the market higher. If this continues, people may get into a mistaken mindset that the market can only go up and overlook the risk that capital and hot would might one day reverse course without warning. 11. Finally, I would like to share with you an article I read last week.