Although global financial markets have been performing impressively, there are risks ahead, Monetary Authority Chief Executive Joseph Yam warns.

In the latest Viewpoint article, Mr Yam said there are a lot of uncertainties confronting Hong Kong's economy and financial markets, particularly the economic and financial outlook for the Mainland and the US.

The American sub-prime crisis persists and tight credit conditions are threatening to slow down the US economy and lead to further downward pressure on property prices, he said. The possibility of a recession in the US cannot be ruled out.

Mainland macro conditions

On the Mainland, although the economy continues to grow at a fast pace, the macro monetary conditions are causing considerable concern. Inflation has been climbing to uncomfortable levels, requiring interest rates to be raised to contain it, but at the same time attracting more capital inflows.

"With plans to encourage the orderly outflow of capital by allowing residents to invest outside the Mainland not yet implemented, and domestic savings continuing to accumulate, the imbalance in the supply of and demand for financial instruments other than bank deposits persists, leading to prices being much higher than would otherwise be the case, and causing concerns about the possibility of a stock-market bubble.

"It is not clear how this scenario might develop. The inevitable market adjustment, if sharp and destabilising, would have serious implications for monetary and financial stability, not just for the Mainland but also for others, including of course Hong Kong."

Future developments

Mr Yam said developments in both jurisdictions in the next few months will be crucial. In the US there is hope normal money-market conditions will return shortly limiting adverse impact on the economy and the housing market there.

"On the Mainland there is hope for more concerted and effective macro-economic adjustment measures now that the Party Congress is over. But there are structural issues in the financial system that will need to be addressed to make it conducive to promoting sustainable economic expansion.

"Against this complex background we in Hong Kong have to be cautious about our short-term economic prospects despite the different and bullish signals our financial markets are sending us. Perhaps there are factors that I have failed to see. Irrational exuberance or not, investors should act with caution."