Financial Secretary John Tsang warns investors to be cautious in their investment strategy as global financial markets have been very volatile this year.

Speaking in the Legislative Council today Mr Tsang said although Hong Kong's economic performance has fared well the prevailing risks and uncertainties cannot be taken lightly.

The US economy, overshadowed by the housing correction and sub-prime mortgage problems, is likely to slow in the coming quarters. If the situation turns out to be worse than expected, Hong Kong and the world will be affected, he added.

Potential threat

"While the credit market turmoil in Europe and the US triggered by sub-prime mortgage problems has eased, and the Hong Kong economy is relatively unscathed so far, the global credit markets have yet to return to normal and the impact of the turbulence on the external economic environment has yet to fully emerge.

"We will have to pay attention to the second, or even the third round effect on the Hong Kong market. On top of this the huge volume of yen carry trade is another potential threat to global financial markets, an area which warrants close attention."

Mr Tsang said the global trade imbalances caused by the persistently large current account deficits of the US economy have yet to be redressed. If the unwinding of the global imbalances turn out to be sharp and disorderly, this could be destabilising to the global economy and international financial markets.

Inflation situation

"Protectionist sentiment primarily out of political considerations is apparently rising in some regions. This, coupled with the slow progress of multilateral trade talks, has added to the uncertainties facing the external trade environment."

Mr Tsang said Hong Kong also has to keep a close watch over its inflation situation. "We have to guard against the risk of Hong Kong falling back into the vicious cycle of cost-price inflation spiral, as it would impede Hong Kong's sustainable economic development."