Ray Dalio, founder of the world’s largest hedge fund Bridgewater, believes that credit cycle is behind everything in the world.
Easy monetary policy often leads to better business performance and higher personal income. In the case of tightening, corporate earnings are more likely to decrease, banks become less willing to lend, and jobless rate tends to go up.
Hong Kong’s housing prices also largely track the broad money supply or M2.
For example, between 2004 and 2007, the housing market bottomed amid China’s economic boom and massive foreign capital inflow into Hong Kong.
Following three rounds of quantitative easing (QE) programs by the United States since the 2008 financial crisis, Hong Kong’s M2 growth was able to maintain high single-digit growth for a sustained period, which underpinned the corresponding home price rally.
The city has gone through three major housing market corrections over the last decade – in 2008, 2011 and 2016 – which all coincided with falling M2.
Under the linked exchange rate system, Hong Kong’s money supply largely depends on the policy of Federal Reserve.
For years, the city should have hiked interest rates amid strong economic growth in Hong Kong and the mainland. However, the Fed kept a low-rate environment to ensure its economic recovery. Hong Kong had no choice but to follow, leading to a spike in home prices to a level beyond what most people can afford.
Now, it’s better for Hong Kong to keep a low interest rate as the US-China trade war escalates and China’s economic growth moderates.
The US started its quantitative tightening in the fourth quarter of last year. And the Fed intends to tighten up liquidity further as US economic growth is picking up and the unemployment rate is falling.
Hong Kong’s M2 growth rate has already eased to 4.2 percent in September from 13 percent at the beginning of this year.
The trend of slowing M2 growth is thus expected to keep pressure on home prices.
The full article appeared in the Hong Kong Economic Journal on Nov 12
Translation by Julie Zhu
[Chinese version 中文版]
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