China's Yuan Move May Stymie Hong Kong Effort to Prevent Property Bubble

China’s steps to cool record property price gains and allow the yuan to appreciate may stymie Hong Kong’s efforts to contain surging home values in a city with its own currency pegged to the U.S. dollar.

A stronger yuan would make Hong Kong’s homes more affordable to mainland Chinese, who have helped drive a 38 percent jump in prices since end-2008, and fuel further increases, seven out of nine analysts surveyed by Bloomberg News said. A revaluation may also encourage locals to buy property to hedge against inflation, they said.

China may allow the yuan to appreciate as it tries to avert the bursting of asset bubbles after stimulating an economic recovery last year with record new loans. The government is stepping up measures to rein in the real-estate market with curbs on third-home purchases and increased down-payment requirements after a record increase in home prices in March.

“China can’t care so much about Hong Kong, because it has problems cooling down its own property market,” said Francis Lui, an economics professor at the Hong Kong University of Science and Technology. “Hong Kong can’t control China, it has no monetary policy and the only tool is to increase land supply, but it will take around four years to build.”

China will allow the yuan to appreciate by June 30 to curb inflation, a survey of analysts showed last week. Options prices suggest Hong Kong’s central bank will maintain its 26-year-old peg to the greenback.

Hong Kong Peg

Ruled as a special administrative region of China, Hong Kong is the mainland’s trade and financial hub with its own legal and currency systems. With the peg to the U.S. currency, Hong Kong has kept its base rate at a record low of 0.50 percent since December 2008, resulting in 20-year-low home loan costs.

Low interest rates, coupled with an inflow of Chinese buying, led Hong Kong’s home values to rise 29 percent last year, according to Centaline Property Agency Ltd., one of the city’s biggest realtors. Luxury residences climbed 45 percent, according to London-based property broker Savills Plc.

About 19 percent of people who bought luxury properties -- those that cost at least HK$10 million ($1.29 million) each or are bigger than 1,000 square feet (92.9 square meters) -- last year were from mainland China, Centaline said.

Bubble Warnings

The price jump has sparked a public outcry over housing costs and increased pressure on Hong Kong’s government to raise land supply. Financial Secretary John Tsang said today the government is “highly concerned” about gains in home prices and will speed up land auctions to make more property available.

Photographer: Jerome Favre/Bloomberg

Potential buyers look at a model of Cheung Hong (Holdings) Ltd.'s Festival City apartment buildings at the residential development's show flat in Hong Kong, April 17, 2010. Close

Potential buyers look at a model of Cheung Hong (Holdings) Ltd.'s Festival City... Read More

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Photographer: Jerome Favre/Bloomberg

Potential buyers look at a model of Cheung Hong (Holdings) Ltd.'s Festival City apartment buildings at the residential development's show flat in Hong Kong, April 17, 2010.

The city may also raise the stamp duty on homes sold for less than HK$20 million and warned that low mortgage rates won’t continue forever. The government in February said the stamp duty on homes selling for more than HK$20 million would be increased to 4.25 percent from 3.75 percent as of April 1.

It raised down payments on luxury homes to 40 percent from 30 percent in October, limited coverage on some loans and clamped down on marketing techniques.

The city’s home prices rose the most among the world’s major housing markets last year, London-based property adviser Knight Frank LLP said in January, climbing 33 percent on average.

Chinese Buying

The International Monetary Fund and investor Jim Rogers warned of a possible bubble in Hong Kong. Tsang said the government wants to reduce the risk of a “property bubble” and keep housing affordable when he delivered his budget speech on Feb. 24.

“Mainland Chinese buying is the most important factor driving up Hong Kong luxury home prices,” said Louis Chan, managing director of residential properties at Centaline. A stronger yuan would “be positive for luxury properties, as they like to buy those that cost between HK$20 million and HK$30 million,” Chan said.

He likened the rich mainlanders to wealthy Hong Kong residents buying properties in London. “These people have deep pockets; the Chinese buy Hong Kong homes to invest, and they like the freedom here where turnover is quick and there are no government constraints on property transactions,” Chan said.

China Curbs

Mainland Chinese can take a maximum of $5,000 cash when traveling abroad without applying for a government permit, according to official rules. Still, with more Chinese living and working in Hong Kong, many have bank accounts in the city. Senior company executives of Chinese companies listed in Hong Kong would also have access to funds in the city, Chan said.

“For people who have sold their property in China and are looking for opportunities, they will probably come to Hong Kong,” said UBS AG analyst Eric Wong. “If their funds are tied to property in China and they can’t get rid of it then it may be tough” given the government’s crackdown.

Residential and commercial real-estate prices in 70 Chinese cities climbed a record 11.7 percent in March from a year earlier, prompting the government to raise minimum mortgage rates and down payment ratios for some home purchases, instruct banks to stop loans for third homes and suspend lending to buyers who can’t provide tax returns or proof of social security contributions.

It also has ordered developers not to take deposits for sales of uncompleted apartments without proper approval, barred them from charging “abnormally high” prices and vowed to punish developers that “artificially” create supply shortages.

Near-Zero Interest

UBS, which forecasts Hong Kong home prices could rise another 27 percent by 2011 from current levels, has included a yuan appreciation of between 3 percent and 5 percent in these projections, Wong said. The median estimate in a survey of 19 analysts by Bloomberg News is for the yuan to strengthen 3.1 percent to 6.62 per dollar by the end of this year.

With bank deposits in Hong Kong paying virtually no interest, investors have piled into property to chase rental yields as high as 4 percent, Centaline’s Chan said. HSBC Holdings Plc, the London-based bank that has the most customers in Hong Kong, gives 0.001 percent interest for deposits above HK$5,000, according to its Web site.

A stronger yuan may also entice Hong Kong residents to buy property as a hedge against inflation, which is likely to rise as Chinese imports become more expensive. Hong Kong’s inflation accelerated to a 13-month high in February, with prices gaining 2.8 percent. The city gets 22 percent of all food imports from China, the Census and Statistics Department said.

‘Temporary Cap’

Reining in Chinese property prices will hurt the luxury Hong Kong market, Marc Faber, who oversees $300 million at Hong Kong-based Marc Faber Ltd. and publishes the Gloom, Boom & Doom report, said in a Bloomberg Television interview today.

“I’d rather think that with a clampdown, they will have a lot of losses in China, and less funds for Hong Kong,” Faber said. “If you have a crash in China property prices, the high- end sector in Hong Kong property will get hit very hard.”

Credit Suisse AG analysts Cusson Leung and Joyce Kwock are betting the other way, arguing that a higher yuan may damp Hong Kong residential real estate because it would mainly benefit assets denominated in China’s currency.

The “primary beneficiary of the RMB appreciation will be RMB-denominated assets,” the Hong Kong-based analysts wrote in an April 13 report, using the acronym for renminbi, another term for the yuan. “We believe this is likely to pose a temporary cap on the momentum of Hong Kong’s property prices, especially after its decent run in the first quarter.”

Cheung Kong (Holdings) Ltd., billionaire Li Ka-shing’s Hong Kong developer, whose revenue from China jumped 77 percent last year, is with those who say a rising yuan will benefit the city’s real estate.

“If the yuan appreciates then it will make our Hong Kong property even more attractive,” said Justin Chiu, an executive director at Cheung Kong.

To contact the reporter on this story: Chia-Peck Wong in Hong Kong at cpwong@bloomberg.net

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