Financial secretary warns on economy as stocks sink

Hong Kong's economy faces a 'rocky' time ahead, the financial secretary said yesterday, as the city's bourse slumped again, wiping out its gains for the year.

The deepening debt crisis in the euro zone and global economic uncertainty add up to 'turbulent' months ahead, John Tsang Chun-wah said, on a day when Greek anti-austerity parties showed gains in opinion polls and Spain's bond yields edged closer to the 7 per cent level that triggered bailouts elsewhere.

The benchmark Hang Seng Index sank to its lowest level so far this year, dropping 2.01 per cent, or 372.75 points, to close at 18,185.59. At the end of last year, the index was at 18,434.39, 1.36 per cent higher than it was yesterday. European stocks fell and US markets opened lower.

Tsang told the Legislative Council's finance committee yesterday that it was 'difficult to predict' the extent of the fallout from Europe, although the situation had deteriorated in recent days. He said the government was ready to tighten mortgage lending to alleviate a property bubble and might have to revise its forecast of economic growth of between 1 and 3 per cent this year.

'Due to the turbulent circumstances, I can't rule out the need to again revise the economic growth forecast in the next few months,' he said, adding that if Greece left the euro zone, there would be a 'massive impact' on the financial market.

Economist Kwan Cheuk-chiu said that the city's economy might contract in the second quarter as the impact of the situation in Europe filtered through. But he said performance for the full year would depend on what contingency measures global leaders took, as well as political developments in Greece, which goes to the polls for the second time in as many months on June 17.

The government said last month that first quarter growth had slowed almost to a halt, with gross domestic product up 0.4 per cent year on year, after a 3 per cent increase in the previous quarter. The growth is largely based on consumption and investment, while exports have suffered.

Tsang, who is rumoured to be staying on as financial secretary when the new government takes office on July 1, said rising property prices were 'unhealthy' because the market had been awash with liquidity and boosted by low interest rates. He said there might be a need to tighten mortgage lending rules to allow the market to develop 'steadily and healthily'.

The Monetary Authority cut the maximum amount banks could advance on a mortgage for a home worth more than HK$10 million by 10 percentage points, to 50 per cent of the property's value. 'If there is a need, the mortgage regulations will be further tightened,' Tsang said.

Tsang urged the public to think twice before buying a home. Buyers were spending an average of 46 per cent of their income on their mortgage, but a 3 per cent increase in interest rates would take that figure to 60 per cent, he warned.

'The developments [in the global economy] have reminded us that we can't blindly believe the property market is a miracle that only rises and never falls,' Tsang said.

But Willy Liu Wai-keung, managing director at Ricacorp Properties, said property prices would not fall even if the Monetary Authority further tightened controls. 'Most of the buyers in the market are homeowners who want to upgrade their living environment, and long term investors,' he said, adding that tightening the mortgage rules would deter many homeowners from upgrading, thereby possibly tightening supply and increasing prices further.