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Hong Kong Monetary Authority

Why Norman Chan can turn those anti-bubble guns away

PUBLISHED : Sunday, 07 November, 2010, 12:00am
UPDATED : Sunday, 07 November, 2010, 12:00am

Hot money heads our way as Fed frees up billions

SCMP headline, November 5

And then we had Norman I-am-Donald's-Boy Chan Tak-lam of the Hong Kong Monetary Authority warning everyone to stay alert and not buy property just because interest rates are low.

Are you sure, Norman? I would have thought low interest rates were a very good reason to buy property, particularly if the latest news has the Fed keeping those rates low for another long spell. But then I also thought that monetary chiefs were not meant to offer specific investment advice.

Oh well, perhaps Norman was distracted by the need to stand on guard, presumably on Waglan Island somewhere, binoculars on chest, peering at the eastern horizon for the first sign of that approaching bubble of hot money headed our way, his anti-bubble guns pointed skywards on either side of him, Spitfires at the ready behind him.

Let's quantify the nature of the threat. Is it true that a bubble of hot money in the United States, which we shall define here as a sudden expansion of the M1 measure of the money supply, translates into a similar expansion of the Hong Kong dollar money supply?

The first chart says that, broadly speaking, yes, it does. It is only what we would expect from a formal currency link with the US dollar. But it does not always happen and it does not happen immediately. That said, it certainly did happen with the stimulus that the US government applied to the US economy in late 2008. Then follows another question. Is it true that the ups and downs of the M1 measure of the HK dollar money supply translate into similar ups and downs in our property market?

The next chart says that it is indeed true, and that this correspondence is even tighter than it is between the US and HK money supply figures. It works that way between money supply and our stock market, too, but I can't show you this in a chart as I did a deal with the boss years ago that I would limit myself to no more two charts per column. He thought I was going to send in a column of charts alone. He was right. Again this should not surprise you, the link between money supply and the property market I mean, not the fact that the boss was just one day ahead of me. The Pope is a Catholic, markets are liquidity driven. Why waste your breath on the obvious.

Thus, out of our way, Norman. When the market is hot, it's hot. Don't try to tell us otherwise.

But just one moment. Look at that first chart again, on the right hand side. The reason the US government wants to push things with another stimulus package is the last one didn't stimulate for very long. M1 growth has fallen to barely 5 per cent, which isn't very high.

What if we have evidence here that dropping money from helicopters, so to speak (Bernankespeak), doesn't really work, that pushing against one end of a rope won't push the other end anywhere, that if Americans are edgy about spending, they won't spend and this latest stimulus will also just fizzle out again.

Because if this is true, then Norman can put his binoculars down and stop scanning the eastern horizon. In that case there will also not be a big liquidity boom in Hong Kong and people who now buy property will find themselves disappointed. Norman will then be entitled to put his thumbs under his lapels and say: 'I told you so.'

On the other hand, if the stimulus works and the US economy returns to boom times, then its consumer goods supplier, China, will see growth boosted well into the teens and you will hardly be able to pick up this newspaper on weekday mornings for all the initial public offering advertisements in the business section. So here is how these scenarios pan out. If the Fed's stimulus fails there won't be a boom here anyway and, if it succeeds, then a boom will be entirely justified.

Either way I can't see why we need to be fussed all that much.