Hong Kong’s economy is more fragile now than in 1997, making the Hong Kong dollar’s peg to the US dollar vulnerable, Kevin Lai, Daiwa Capital Markets’ chief economist for Asia ex-Japan, warned.
Four out of six parameters in a measure of economic fragility show a weaker trend, the Hong Kong Economic Journal reported Friday, noting Lai’s research.
These parameters include net inflow of funds, credit expansion, loans to the Asian region and aggregate mortgage value.
The city has enjoyed a cumulative net funds inflow of US$307 billion as one of the major beneficiaries of the quantitative easing policy of the United States over the past 12 years, compared with US$24 billion in 1997.
Such funds, created as US dollar debt, fed the bubbles in Hong Kong’s credit and property markets, which will burst within the next two years when the US moves toward deleveraging and interest rate hikes, the report said.
The US dollar peg may be at stake, with serious consequences, as experienced after the Asian financial crisis, should the Hong Kong Monetary Authority go all out to defend the link, Lai said.
Hong Kong entered a six-year period of deflation following the Asian financial crisis.
Lai warned about signs of deterioration in credit quality, the value of the renminbi and the city’s property prices.
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