The Chinese city could cut taxes, provide subsidies to the poor or roll back some property-cooling measures, the Washington-based fund said in a report released today. Policy makers must be ready to react, even though a deepening crisis is a “low probability tail event,” it said.

Global stocks fell as the European Central Bank damped speculation that it would increase debt purchases to fight the region’s crisis. Recession is “possible” for Hong Kong on deteriorating exports and the government will ease property curbs in the event home prices slump, Financial Secretary John Tsang said this week.

“The risks to Hong Kong from the euro area have risen markedly in recent months,” the IMF said in the document, dated Nov. 14. “As a highly open, international financial center, Hong Kong would be hit hard by a significant shock to external demand that would spill into Hong Kong through both trade and financial channels.”

Hong Kong narrowly dodged a recession in the third quarter with 0.1 percent growth from the previous three months, as low unemployment and tourists from China boosted consumption while Europe’s crisis dragged on exports. Chief Executive Donald Tsang said last month the city may see “a couple of quarters of bad times” and growth may slow to 2 percent next year, down from an official estimate of 5 percent in 2011.

Property Slowdown

While the city’s property market is clearly slowing, the outlook is “highly uncertain,” the IMF said. Hong Kong should reverse some tightening measures on residential property in the event of pressure from external shocks, it said.

Home prices dropped 3.5 percent from the peak in June, according to an index compiled by the Centaline Property Agency Ltd., the city’s largest closely held property broker. The value of home sales slumped 40 percent in November from a year earlier, according to the Land Registry.

The city pledged in October to build subsidized homes and ensure land supply for private housing, after it last year imposed higher charges on homes sold within two years of purchase and raised some down payments. Residential prices had surged 70 percent since the start of 2009 on low mortgage rates and an influx of mainland Chinese buyers.

Inflation, excluding distortions from government subsidies, accelerated to record 6.4 percent in October. Rising consumer prices has led to proposals of changing the city’s 28-year-old currency peg to the U.S. dollar. The fixed exchange rate system “merits continued support” because it provides financial stability, the IMF said.

To contact the reporter on this story: Sophie Leung in Hong Kong at sleung59@bloomberg.net

To contact the editor responsible for this story: Paul Panckhurst at ppanckhurst@bloomberg.net

http://www.bloomberg.com/news/2011-12-09/imf-says-hong-kong-needs-immediate-stimulus-should-crisis-cause-recession.html

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