HK Budget 2010 – Financial Analysts Applaud Tsang’s Caution

Hong Kong – The numbers looked good. When Financial Secretary John Tsang stood up to give the annual budget speech,  he told the territory it could expect a GDP growth rate of between four and five per cent on the year in 2010-11 and outlined a series of give-aways totalling about HK$20 billion.

But he also issued a warning about the large volumes of capital pouring into Asian markets.

Government figures show some HK$640 billion had flowed into the Hong Kong economy since the fourth quarter of 2008. This had stimulated speculative investment and stoked fears of serious overpricing in the housing market.

In a bid to deflate a potential property market bubble, Tsang proposed to increase the supply of flats and raise taxes on transactions of luxury homes.

The government will request the MTR Corporation Ltd — Hong Kong’s railway which derives significant income from building high-rise blocks of flats above its stations — and the government-controlled Urban Renewal Authority, to bring more residential sites to the market.

Tsang said the government expects to increase the number of private housing units to 14,300 by 2010. The government would relax the conditions required to trigger auctions of land for urban residential development. sites will also be sold by auction or tender, if the market condition will demand it.

Stamp duty on transactions of properties valued more than $20 million will be subjected to half percentage point rise, from 3.75 to 4.25 pct. Tsang said the housing market as a whole will be closely monitored and, if there is excessive speculation in the trading of these properties, the government will consider extending the tax increase to other sections of the housing market.

Ricky Ngan, Ceo of the financial advisory firm BMI Fund Managment, praised the direction the Financial Secretary took to cool down the housing market. “Compared to 1997, when the prices of luxury flats experienced a sharp peak, the government  seems to be giving better responses,” he said, “They decided over measures that are doable, and can be implemented within a year.”

Ngan said the tax will not weigh on the general public, “but it will help Hong Kong’s property market.”

Ngan acknowledged the government’s effort to strike a balance between reducing the risk of a housing bubble, while not upsetting the property market overall. “The government showed a relaxed approach to tackle the problem,” he said, adding that this attitude will give more time and freedom to control the supply of flats. “The property market reacts immediately to sudden change in regulation, it is important not to upset it.”

In his third budget address to the Legislative Council, Tsang insisted that  Hong Kong should preserve its central position as a financial hub. “The market mechanisms should be trusted to effectively adjust Hong Kong’s economy,” he said during the speech, and announced intervention to boost the most promising sectors.

Janus Chan, Economist at the Hong Kong and Shanghai Banking Corporation, said that the government’s commitment has focused on the four traditional pillar industries, namely financial services, tourism, trading and logistics, and professional services. “This budget is more generous with the private sector than it was last year,” she said, and added that the construction sector also benefited.

In a bid to popularise trading in regional shares, Exchange Traded Funds (ETFs) with no more than 40 per cent of Hong Kong stocks in their portfolios will be granted a stamp duty concession.

“It’s encouraging, it shows that the government is interested in the industry,” Ngan said. “I think more and more companies will try to put their stock in the ETFs,” he added.

A desire for a mature financial integration with the mainland triggered policies to develop offshore renminbi business. The government committed to expand the issuance size of RMB bonds and increase the types of bond issuers and the classes of qualified investors. Last year, the amount of RMB bonds issued in Hong Kong reached RMB 16 billion, including RMB 6 billion of sovereign bonds launched in Hong Kong for the first time, Tsang said.

“We hope to see RMB business scale new heights this year,” Tsang added.

Guy Ellis, Tax Partner at Price Waterhouse Cooper, said he expected the government to be bolder and increase nominal taxes to rise its revenues. “There were no significant reduction in property tax rates or income tax rates, nor there were any increases in personal allowances,” he said, adding that the government may decide to raise taxes in a latter stage.

“Time will tell whether these measures will protect Hong Kong in the current economic climate,” Ellis said.