Is An Asset Bubble Forming in Hong Kong’s ETF?

November 19th at 1:00am by Tom Lydon

ETF hong kongAfter a slew of measures and policies that pumped world economies full of money, a lot of cash found its way into Asia, and Hong Kong is not pleased. Officials feel that Hong Kong’s economy and related exchange traded fund (ETF) have become artificially distended by international investors.

Norman Chan, monetary authority chief executive in Hong Kong, has suggested that low interest rates and quantitative easing of U.S. monetary policy has allowed people to borrow at low cost and reinvest into Hong Kong’s economy, which is consequently fueling an asset bubble, reports Alex Frangos for The Wall Street Journal. With Hong Kong’s economy in the early stages of recovery, some observers are warning of dangerous bubbles seen forming in property and stock prices. (Hong Kong gearing up for a correction?)

Hong Kong’s currency is pegged to the U.S. dollar and the monetary authority basically has no control over interest rates. Still, if they are able to adjust target interest rates, raising rates will attract more money from foreign investors hunting for higher yields, which would also drive up asset prices.

Other happenings in Hong Kong include:

  • Residential property prices in Hong Kong are increasing as buyer interest from mainland China rises, but completion of housing construction remains low. Gonvernment stimulus and low interest rates have provided the necessary money for funding, according to NuWire Investor. Hong Kong’s overall residential price index rose 8.3%, or 8.4% in real terms, in the second quarter of 2009.
  • According to the International Monetary Fund (IMF), Hong Kong’s economy is projected to contract 2% in 2009 and expand 5% in 2010. The fall in exports and imports is slowing, as well as the fall in private consumption.

For more information on Hong Kong, visit our Hong Kong category.

  • iShares MSCI Hong Kong Index (NYSEArca: EWH): up 58.4% year-to-date

ETF EWH

Max Chen contributed to this article.

The opinions and forecasts expressed herein are solely those of Tom Lydon, and may not actually come to pass. Information on this site should not be used or construed as an offer to sell, a solicitation of an offer to buy, or a recommendation for any product.

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