In this article, I will point out and discuss the effect of the reform of exchange rate institution on the real estate market, and the discussion suggests that the appreciation of RMB leads to the rise of real estate price, but as well as the possible eco-nomic bubble in Hong Kong. The influx of capital flows and the real estate price volatility in Hong Kong real estate market shows that the expecta-tion of the appreciation of RMB is one of the ele-ments that inspires investment speculating in the real estate market causing the possible imbalance of demand and supply and various social prob-lems.
RMB appreciation stimulates mainland inves-tors to enter the Hong Kong real estate market
An appreciating RMB will impact the Hong Kong economy and hence the real estate market in di-rect and indirect ways. Indirectly, it spurs capital inflows into Hong Kong in order to lower the local interest rates, creates an accommodative mone-tary environment and yields substantial wealth effects from a surging stock market. As a result, such wealth effects are expected to spill over into the property market. Lower interest rates will also provide incentives for increased borrowing and boost asset prices. Under the current currency system, an increase in liquidity would suppress Hong Kong-dollar interest rates. If money supply exceeds the desired money demand, inflationary pressure will rise. The positive outlook for asset prices and expectations of further appreciation of the RMB might attract substantial capital flows into Hong Kong.
Hong Kong – an alternative exit for Chinese hot money
In the long run, it is believed that the reform of RMB exchange rate system and its revaluation will not have any significant adverse effects on China, but is rather one of the steps towards China’s stra-tegic goal of gradual appreciation and loosening of capital control for RMB.
The domestic policy tightening in mainland China as well as the appreciation of the RMB causes the China investors to diversify their investment port-folio, Hong Kong is expected to be one of the first spots for it. Chinese investors in search of alterna-tive real estate options, to reduce the overheating of domestic market risk exposures. China on the overseas property market influence eclipsed. Chi-na real estate investors are mostly limited to in-vestment in the domestic market, forcing the Government to take vigorous measures to sup-press excessive rise in prices of China’s domestic policy tightening in real estate, and the apprecia-tion of the RMB will, analysts expect more Chi-nese people to those high returns and low limit of the overseas market investments such as Hong Kong.
Published in Political Reflection Magazine Vol. 3 No. 1