The Hong Kong currency board arrangement means net Hong Kong financial assets (AKA money supply) can grow only via net exports (and/or external debt).
This means market forces work to sustain net exports ‘at any cost’.
The usual result is a deflationary mess, until ‘competitiveness’ is achieved to the extent net exports are sufficient for funding the domestic desire for net financial assets.
See ‘Exchange rate policy and full employment’ at http://www.mosler.org for more details of this process.
Yes, the monetary authority can intervene and give up its reserves to a ‘savings hungry’ domestic market, but at the risk of quickly running out of reserves needed to facilitate convertibility of Hong Kong dollars on demand.
Best I can tell, currency boards were originally instruments of colonial exploitation, designed to force net exports to the mother country.
Today, that’s an enormous price to pay for ‘currency stability’.
By Kelvin Wong and Nipa Piboontanasawat
Nov. 4 (Bloomberg) — Hong Kong’s home sales posted the biggest drop by volume in almost nine years, as local lenders tightened mortgage lending amid a slowdown in the economy.
The number of residential units that changed hands in the city last month slumped 58.1 percent to 4,719, according to a Land Registry statement today. That’s the largest drop since November 1999 and the fourth straight month of declines.
By value, sales of residential units dropped 63 percent from a year earlier to HK$16.3 billion ($2.1 billion).
The economic outlook, coupled with declines in the Hong Kong stock market, have curbed demand for real estate and led potential buyers to expect cheaper prices. The Hang Seng Index has dropped 48 percent this year.
Home prices on Hong Kong island, which houses some of the world’s most expensive apartments, had their biggest weekly drop in the week ended Oct. 19, according to figures compiled by Centaline Property Agency Ltd.
“We’ll probably see even worse figures for the following month,” said Wong Leung-sing, an associate director of research at Centaline. “Then things should improve slightly as many
people may try to buy at low prices.”
Hong Kong’s bank lending rose 13 percent in September, the slowest pace in 13 months, and almost half the 24 percent increase in August.