Hong Kong could slide into a recession next year because of depressed trade and instability in the financial sector, the International Monetary Fund warned.
In a report released yesterday, it said the rapid growth in bank loans also raised the risk of rising bad loans.
'Credit has been growing at an extraordinary pace, particularly for loans in foreign currency,' the IMF said. 'International experience would suggest that this rapid pace of credit growth has the potential to lead to a worsening of average credit quality, particularly if the business cycle swings to reverse.'
The IMF also cautioned that Hong Kong's growth would slow to 4 per cent next year, or even become negative, should the euro-zone crisis spin out of control and hurt the city's trade and financial sectors.
The warning comes a week after Chief Executive Donald Tsang Yam-kuen said Hong Kong might see 'a couple of quarters of bad times', amid a 50 per cent chance that the global economy could shrink.
'We try and quantify these downside risks using a scenario in which the Europe debt crisis reduces global growth by 3 percentage points, which results in a fall in Hong Kong growth of 4 to 4.5 percentage points,' said Sean Craig, the IMF's representative in Hong Kong.