Is an Asset Bubble Forming in Hong Kong’s ETF?

| About: iShares MSCI (EWH)

After a slew of measures and policies that pumped world economies full of money, a lot of cash found its way into Asia, and Hong Kong is not pleased. Officials feel that Hong Kong’s economy and related ETF have become artificially distended by international investors.

Norman Chan, monetary authority chief executive in Hong Kong, has suggested that low interest rates and quantitative easing of U.S. monetary policy has allowed people to borrow at low cost and reinvest into Hong Kong’s economy, which is consequently fueling an asset bubble, reports Alex Frangos for The Wall Street Journal. With Hong Kong’s economy in the early stages of recovery, some observers are warning of dangerous bubbles seen forming in property and stock prices.

Hong Kong’s currency is pegged to the U.S. dollar and the monetary authority basically has no control over interest rates. Still, if they are able to adjust target interest rates, raising rates will attract more money from foreign investors hunting for higher yields, which would also drive up asset prices.

Other happenings in Hong Kong include:

  • Residential property prices in Hong Kong are increasing as buyer interest from mainland China rises, but completion of housing construction remains low. Gonvernment stimulus and low interest rates have provided the necessary money for funding, according to NuWire Investor. Hong Kong’s overall residential price index rose 8.3%, or 8.4% in real terms, in the second quarter of 2009.
  • According to the International Monetary Fund (IMF), Hong Kong’s economy is projected to contract 2% in 2009 and expand 5% in 2010. The fall in exports and imports is slowing, as well as the fall in private consumption.
  • The unemployment rate in Hong Kong dropped from the previous months to 5.2% for the three months ending in October as construction, food services, insurance and wholesale sectors hired more people, according to China View.
  • iShares MSCI Hong Kong Index (NYSEArca: EWH): up 58.4% year-to-date


Max Chen contributed to this article.

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