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.

• The unemployment rate in Hong Kong dropped from the previous months to 5.2% for the three months ending in October as construction, food services, insurance and wholesale sectors hired more people, according to China View. (Hong Kong faces its pressures)
  

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

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

Max Chen contributed to this article.

South Korea’s growth in the third quarter was at its quickest rate in more than seven years, accompanying China and Singapore in reporting faster growth during the September quarter, reports Gillian Murdoch for Reuters. (How to capture China’s growth).

• iShares MSCI South Korea Index (NYSEArca: EWY)
• iShares FTSE/Xinhua China 25 Index (NYSEArca: FXI)
• iShares MSCI Singapore Index (NYSEArca: EWS)

Japan, Singapore, Hong Kong, Thailand and Taiwan all officially exited a recession in the second quarter.

• iShares MSCI Japan Index (NYSEArca: EWJ)
• iShares MSCI Hong Kong Index (NYSEArca: EWH)
• iShares MSCI Thailand Invest Mkt Index (NYSEArca: THD)
• iShares MSCI Taiwan Index (NYSEArca: EWT)

Japan, however, grew 0.6% in the second quarter – less than expected. (Small-cap plays for Japan).

Singapore’s economy expanded in the second quarter at its fastest rate in almost six years, as a result of a surge in biomedical production and construction. (Sectors pushing Singapore’s growth)

Hong Kong pulled out in the second quarter after its economy grew at a faster-than-expected 3.3% from the previous quarter. (Is Hong Kong facing a correction?)

Thailand’s economy grew 2.3% in the second quarter from the first quarter on a recovering manufacturing sector. (Reasons to watch Thailand)

Taiwan’s economy saw growth for the first time in a year during the second quarter. Officials expect rising demand from China to support the island’s recovery. (Why Taiwan’s heating up).

• iShares S&P Asia 50 Index (NYSEArca: AIA)
• BLDRs Asia 50 ADR Index (NasdaqGM: ADRA)

For more information on Asia, visit our Asia category.

Max Chen contributed to this article.

The global economic recovery is not yet a firm one, and any poor data from the United States or China might prompt Hong Kong’s investors to forgo risk in favor of safety, remarks Roland Lim for channelnewsasia. Alex Wong, director of Ample Capital, estimates that a 30% correction could occur if there is a flight to safety.

Hong Kong’s Hang Seng Index has jumped about 50% year-to-date, and the index constituents are trading at 18 times price earnings. The 20-year average is 14 to 15 times. According to a study conducted by JP Morgan (NYSE: JPM) Asset Management, ar0und 60% of participants believe the local stock market is still volatile.

Hong Kong Chief Executive Donald Tsang may set out plans to develop additional industries to help Hong Kong diversify from its two major industries, finance and trade, reports Sophie Leung for Bloomberg. New industries could include medical services, education, cultural and creative industries, environmental protection, innovative science and technology, and inspection and certification. (Go here for more stories on the Asian region).

If a market correction occurs in Hong Kong, be sure to have an exit strategy to protect yourself on the downside. The ETF Trend Following Playbook has more on ETF strategy.

For more information on China, visit our China category.

• iShares MSCI Hong Kong Index (NYSEArca: EWH): up 59.1% year-to-date

Max Chen contributed to this article.

Hong Kong

Hong Kong’s economy grew a seasonally adjusted 3.3% in the second quarter from the first quarter, underscoring the fact that a recovery in the Asian region is coming around, reports Bettina Wassener for The New York Times.

Large stimulus measures have been bolstering mainland China’s growth and Hong Kong has benefited from the growth there. Goldman Sachs’ (GS) economists believe Hong Kong’s economy may contract 3% this year, followed by 5% growth in 2010. The government, however, projects a 3.5% to 4.5% contraction, lower than its earlier forecast of a 5.5% to 6.5% decline.

Seasonally adjusted joblessness stands at 5.4% in the May-to-July period and economists expect it to increase slightly to 5.5%, according to RTTNews. Secretary for Labor and Welfare Matthew Cheung Kin-chung stated that unemployment could face upward pressure as businesses remain cautious and employers remain conservative in hiring.

Officials remain skeptical about an economic recovery, citing the fact that the “rather bumpy” process heavily depends on development in the global economy and the extent of the misnomer swine flu.

• iShares MSCI Hong Kong Index (EWH): up 47% year-to-date

For more information on China, visit our China category.

Max Chen contributed to this article.

On the minus side:

• Hong Kong’s jobless rate increased 0.1% from May to reach 5.4% for June, which is making it harder for the government to revive growth, reports Sophie Leung for Bloomberg. The city has injected $11.3 billion, or 5.2% of GDP, to help the stumbling economy.

• GDP diminished a seasonally adjusted 4.3% in the 1st quarter from the previous three months, and the final numbers for the second quarter may not be as severe as the 7.8% decline in the first quarter year-over-year.

• Bankruptcy petitions in Hong Kong climbed 89% in June to 1,619 year-over-year.

But in better news:

• Financial Secretary John Tsang says export demand is improving and that is what attributed to the smaller decline in the economy for the second quarter.

• The Financial Secretary previously projected a 6.5% contraction for 2009 after a significant decrease in demand for Chinese goods shipped through the city.

• The Hong Kong Hang Seng Index climbed 60% from the March 9 low on hopes that worldwide stimulus plans would revive the city’s growth, write Nipa Piboontanasawat and Kevin Hamlin for Bloomberg.

• Home sales also increased 19.3% this year.

• iShares MSCI Hong Kong Index (EWH): up 42.3% year-to-date

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

Max Chen contributed to this article.

A $2.2 billion stimulus of sorts is in the making in Hong Kong. The country, like many of those in Asia, is spending the money on tax cuts and fee waivers for citizens to stave off a deeper slowdown within the economy. Likewise, the country will do more if the condition gets worse, since this is the biggest slowdown since the Great Depression, reports Theresa Tang and Kevin Hamlin for Bloomberg.

Fees for business registrations and for entertainment and restaurant licenses will be dropped for a year. The government will waive property rates for two more quarters.

On the other hand, so-called “giveaways” that residents had expected will not materialize. The government also has a budget surplus instead of a deficit that had been expected.

Meanwhile, the liquidity in Hong Kong kept the local unit strong against the U.S. dollar late Friday, and pushed the benchmark Hang Seng Index to close above the psychological 18,000 mark. Economists do not expect much more flow-driven rallies in the second half of the year, with large capital outflows from Hong Kong not likely, reports Aries Poon for The Wall Street Journal.

• iShares MSCI Hong Kong Index (EWH): up 36.7% year-to-date

It is unlikely that the Asian tigers will be returning to large growth rates of years past and domestic demand alone could show growth of almost 7% in emerging Asia, according to The Economist. Economists now expected that China may have GDP growth of 8%.

Growth in smaller, export-driven economies such as Hong Kong, South Korea, Singapore and Taiwan could remain more moderate. Global demand still makes up a large factor for these countries and rising unemployment will reduce consumer spending.

• iShares MSCI Hong Kong Index (EWH): up 25.5% year-to-date
• iShares MSCI South Korea Index (EWY): up 32.1% year-to-date
• iShares MSCI Singapore Index (EWS): up 27% year-to-date
• iShares MSCI Taiwan (EWT) is up 40.2% year-to-date

The IMF projects a 1.6% growth in 2010 for smaller emerging Asian countries, but other economists suggest smaller Asian economies could grow up to 4% or even 7% once China and India start going.

• iShares FTSE/Xinhua China 25 Index (FXI): up 21.6% year-to-date
• WisdomTree India Earnings (EPI): up 47.7% year-to-date

The previous downfall of Asian economies is largely blamed on the high savings and low spending rates within the countries, or it can be attributed to the cyclical economic forces that the large manufacturing sectors are now facing. But Asian economies that dropped the steepest as a result of heavy reliance on manufacturing could see a drastic recovery when the time comes.

Fiscal stimulus plans, mostly 4% of GDP, in Asia were larger than in any other region, and so far the big push appears to be paying off. And thanks to low consumer debt, government cash handouts in Asia are also more likely to be spent than saved, which will further fuel domestic demand. Asian banks are in a better position to support increased domestic spending.

Max Chen contributed to this article.

Global specialist Nicholas Vardy notes that Hong Kong’s performance has been tied to the monetary policies of the United States, remarks Steven Halpern for BloggingStocks. The Hong Kong currency board keeps the H.K. dollar at a preset exchange rate to the U.S. dollar.

History has shown that when the Fed reduced real rates to zero (in 1992-1993 and 2003-2005), the Hong Kong stock market has doubled. Vardy says that Hong Kong is the safest and most liquid direct way to play China’s stimulus package and global economic recovery.

Hong Kong’s economy has strong fundamentals and is one of the “freest” markets in the world. It is also seen as one of the safest plays on news of government stimulus plans and an eventual global recovery. When the market has plummeted to low levels in the past, Hong Kong stocks have gone on to produced double or triple gains in a few years.

The Hong Kong stock market has crossed the 200-day moving average.

• iShares MSCI Hong Kong Index (EWH): up 20.6% year-to-date

Max Chen contributed to this article.

China and Brazil’s growing relationship has helped foster boosts in Brazil’s markets, MSCI Brazil Index Fund (EWZ), which is up 14.6% in the last month and up 20.4% in the last three months, along with China’s. After China announced its plans for a stimulus package, markets of its trading partners, Singapore and Hong Kong, both moved up, writes Gary Gordon for ETF Expert.

Potential bargain hunters may be enticed by single digit P/Es and dividend yields of iShares MSCI Hong Kong Index (EWH), which is up 10% in the last month and iShares MSCI Singapore Index (EWS), which is up 7.2% in the last month and down 5.9% in the last three months. EWH has a P/E ratio of 9.2% and a dividend yield of 7.4%, while EWS has a P/E ratio of 9.7% and a dividend yield of almost 10%.

Note that all three funds have moved above their short-term trend lines.

The institute for International Finance has estimated that bank loans and private non-bank debt investment in emerging markets will decline in 2009, leaving the countries with strong balance sheets to come out on top.

Brazil may do pretty well with a strong domestic savings base, interest rates higher than inflation and a more open policy toward foreign direct investments. Singapore also has large reserves on hand and little debt, and it could even be Singapore that will be lending to other emerging markets.

Max Chen contributed to this article.

China’s Communist Party has announced a hefty boost in public spending to ease along economic growth as export demand slows and the Central Bank has warned of deflationary risks, report Zhou Xin and Chris Buckley for Reuters UK. The government will spend money on infrastructure projects, social security improvements and expand domestic demand to enhance economic growth.

China’s Central Bank has prioritized the maintenance of stable economic growth by relaxing monetary policies and ensuring sufficient liquidity. The bank will also keep the yuan stable at a balanced level with a more flexible exchange rate.

The Chinese government is distributing around $580 billion in stimulus spending that was previously announced at the end of last year. China’s economic growth has dragged to 6.8% in the fourth quarter from 9% in the third quarter, and 10.1% in the second quarter.

According to TheStockAdvisors for iStockAnalyst, a potential investor should not miss out and have some exposure to the Chinese market when a recovery eventually comes their way. They note three ETFs to play through China’s markets:

• iShares FTSE/Xinhua China 25 Index Fund (FXI). It covers the largest and most liquid Chinese companies that are available to foreign investors. It is seen as a Chinese version of the Dow.
• iShares MSCI Hong Kong Index Fund (EWH). This is a broader ETF that covers 85% of publically available capitalizations of the Hong Kong Market. It is similar to our Wilshire 500. There are 44 holdings in the ETF. Financials account for 56%. Utilities make up 19%, industrials 12%, consumer discretionary 9%, tech 1.5%, telecom 1.5% and energy 0.4%.
• PowerShares Golden Dragon Halter USX China Portfolio (PGJ). This ETF tracks the Halter USX China Index which is made of U.S.-listed companies that get most of their revenue through China.

Carl Delfeld, managing director and global strategist of Chartwell Partners Wealth Management, thinks FXI is poised to fall more, writes Trang Ho for Investor’s Business Daily.

The Finance Minister calculates a deficit of $139 billion, or 3% of GDP. Exports fell 17.5% in January compared to the same month last year. Imports also diminished 43% for the same year-over-year period. The government has vowed to keep an 8% GDP growth target.

If you’re looking into a Chinese-themed country ETF and still don’t know which one you’d like then take a look here for a more in-depth view of other differences.