Is Hongkong Poised for a Collapse?

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By Jacob Maslow

hong kong skyscrapersHong Kong’s economy and government profits provide a very interesting contradiction. On the one hand, Hong Kong’s government posted a budget surplus of HK$64 billion as reported last week. However, the other side of this otherwise rosy figure is that the overall Hong Kong economy just grew at the anemic rate of 0.4% during the final quarter of 2014.

What accounts for these seemingly paradoxical growth patterns? The answer is actually quite simple: real estate. Thanks to the sky-high Hong Kong property prices and red-hot real estate market, the local government is raking in tons of cash. Its property prices have appreciated at a clip of double digits over the past several years, and this has translated to hefty government revenues. However, Hong Kong’s economy might have reached the crossroads where further increases in the local property market might actually depress its economic activity.

Keep in mind that there are three factors that have led to Hong Kong going through economic boom times. First, loose monetary policies as expressed in low interest rates. Second, a huge inflow of tourists from Mainland China. Third, the territory’s use as a hub for re-exporting products from the rest of China. Unfortunately, for Hong Kong, all three factors are set to turn negative in 2015 according to recent report by UBS.

If you’re thinking of investing in the Hong Kong real estate market, you might want to think twice. You have to understand that the Hong Kong dollar is pegged to the US dollar. Any interest rate increase by the US Federal Reserve is sure to undermine the performance of the Hong Kong dollar and most importantly, dry up funding sources for the red-hot local real estate market.

Moreover, Hong Kong’s ten-year-old property bull market is overextended. It may have reached the extent of its run and might hit a wall and start trending downwards. If this happens, this can take down the rest of Hong Kong’s economy because the real estate market plays such a crucial role in the territory’s overall economic performance. Put all these factors together and Hong Kong’s economy in 2015 might face some serious challenges.

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