Property-curb comments prove Tsang's lost the plot

John Tsang Chun-wah is trying to talk up Hong Kong's property market.

In an interview in South Africa this week, the financial secretary said Hong Kong's government was preparing to relax its restrictions on home purchases in response to softening prices.

This is mighty curious, and not just because it's only two weeks since Tsang was warning about the risk of a property bubble.

It's curious because it betrays some seriously muddled thinking over in the financial secretary's office.

The curbs Tsang is talking about consist largely of limits on maximum loan-to-value ratios imposed on mortgage borrowers by the Hong Kong Monetary Authority.

For example, in the latest round of measures announced in June, buyers of high-end properties were told they would have to put up a down-payment of at least 40 per cent of the home's value.

And buyers at the very top end of the market - purchasing properties worth HK$10 million or more - were told they would have to put up a deposit of at least 50 per cent.

Contrary to what Tsang seems to think, however, these restrictions were never intended to cool the property market.

What they were meant to do was to protect Hong Kong's banks against losses.

Supervisors at the HKMA were getting concerned about the banking system's exposure to property prices. They were worried that with loans to the property sector growing, a fall in prices could plunge many home buyers into negative equity, leading to a sharp deterioration in the quality of assets held by the banking system.

As a result, the HKMA imposed tighter ceilings on permitted loan-to-value ratios in order to provide the banking system with a buffer against falling property prices.

It displays some truly tortured logic for the financial secretary to suggest that those controls should be relaxed now just as property prices are indeed beginning to fall.

The banking system's exposure to the property market is not appreciably lower today than it was in June when the HKMA last tightened its rules. Some 25.2 per cent of all Hong Kong dollar loans outstanding in September were residential mortgages, compared with 25.3 per cent in June.

And the average loan-to-value ratio was 52.4 per cent, compared with 55.4 per cent back in June.

So if banking supervisors were worried about the risk of a fall in property prices then, they must be even more worried now that prices are actually declining.

As a result, it would make no sense at all for the HKMA to relax its risk controls now, as Tsang is suggesting, just as that very risk is materialising.

You may be wondering what on earth the financial secretary is doing in South Africa anyway, when he should be at his desk, working out how best to give the HK$35 billion budget surplus the Hong Kong government is expected to run this year back to the city's hard-working people.

The answer is that Tsang is playing the travelling salesman. He's there trying to persuade South African companies to list on the Hong Kong stock exchange, in which he bought a 5 per cent stake back in 2007.

Unfortunately, the financial secretary clearly doesn't understand finance very well. The only reason South African companies would be interested in listing in Hong Kong, rather than on their home market of Johannesburg, would be if they could get a higher price for their shares by coming here.

And as Tsang would know if he had bothered to check before getting on the plane, the Hong Kong market is currently trading at a price-to-earnings ratio of 8.7.

The Johannesburg market, in contrast, is on a PE ratio of 11.6. That means South African companies can command a 33 per cent premium by selling their shares at home instead of in Hong Kong.

As a result, they are hardly likely to be impressed by Tsang's sales patter. But as we know, the financial secretary really isn't very good with money. After all, those shares in HKEx that be purchased on our behalf have fallen in price by 16 per cent since he bought them. If he had stuck to US Treasury bonds, he would have earned us a total return of almost 40 per cent by now.