Hong Kong's economy bounced back strongly last year thanks to strong growth in mainland China and the rest of Asia, the city's finance chief said Wednesday while warning that rising inflation and property prices could undermine the recovery.
Financial Secretary John Tsang also said the government would release more land for development in a bid to keep a lid on surging property prices that risk stirring widespread anger.
The compact city's government is also looking at other measures including reclaiming land from the sea and using rock caverns to house sewage treatment works and other services in order to free up land for housing.
"Today, our economy has fully recovered," Tsang said in his annual budget speech.
However, "the risk of rising inflation is mounting in Asia" and efforts to tamp down prices are the government's "major task this year," he said.
Tsang said the strong economic recovery, as well as a weak U.S. dollar and rising global food and commodity prices would add to pressure for living costs to rise. Rising prices for food from mainland China as well as local rents are expected to have a "more noticeable effect" on inflation this year.
Tsang forecast inflation of 4.5 percent in 2011 while economic growth would ease to between 4 percent and 5 percent _ down from 6.8 percent last year.
In the following four years, GDP is forecast to expand 4 percent annually while inflation will average 3.5 per cent.
A property bubble poses a particular risk to the economy in 2011, Tsang said.
Hong Kong property prices have surged over the past year, driven by wealthy Chinese investors snapping up a limited supply of units and fueling fears of a bubble.
Low interest rates on plentiful mortgages have also helped fuel the boom. Because Hong Kong's currency, the Hong Kong dollar, is pegged to the U.S. dollar, the southern Chinese financial center is also forced to adopt the same ultra-low interest rates the U.S. has been using to kickstart its economy.
And because the currency is pegged, it isn't able to strengthen or weaken according to economic performance. Instead, prices of assets such as houses and apartments swing widely instead.
Tsang warned that the factors fueling the property boom could change.
"I have repeatedly reminded the public that an environment with abundant liquidity and ultra-low interest rates will not last forever. "
Tsang announced that 52 sites will be put up for sale in the year starting April 1 that will provide about 16,000 apartments, 70 percent more than the previous financial year.
Virtually all land in Hong Kong is owned by the government, which auctions it off to property developers.
Tsang said government engineers are examining the possibility of using of underground rock caverns for government facilities. Sewage treatment plants and service reservoirs could be relocated there so land could be used for housing.
The government will also examine locations outside of Hong Kong's famed Victoria Harbor that could be used for land reclamation as it explores "new ways to increase the supply of land," Tsang said.