May 6, 2022
HONG KONG – Financial Secretary Paul Chan Mo-po warned that Hong Kong may face a more challenging external business environment amid monetary tightening by the US Federal Reserve.
“We need to monitor the impact of US interest rate hike on the local asset market and the credit quality of the local banking system,” the finance chief said on Thursday.
“We will also monitor the impact on local consumption and investment activities, and what kind of financial burdens it (interest rate hike) will bring to mortgage loan borrowers and small and medium enterprises in the city, as they have to make more repayments from their mortgage loans or business loans,” he said.
Eddie Yue Wai-man, the chief executive of the HKMA, said that the Fed’s decisions on an interest rate hike and balance sheet reduction were in line with market expectations, adding that he believes the rate hike will not undermine the monetary and financial stability of Hong Kong
Hong Kong Monetary Authority raised the base rate to 1.25 percent on Thursday, after the Fed lifted interest rates by 50 basis points in its Wednesday meeting, raising the target range for the federal funds rate to 0.75 percent to 1 percent. This was the first 50 basis-point rate hike by the US central bank since 2000.
The US Fed also announced that it will start shrinking its balance sheet from June by not replacing assets as they mature. The balance sheet will be allowed to fall by $47.5 billion per month initially, rising to $95 billion per month after three months.
Eddie Yue Wai-man, the chief executive of the HKMA, said that the Fed’s decisions on an interest rate hike and balance sheet reduction were in line with market expectations, adding that he believes the rate hike will not undermine the monetary and financial stability of Hong Kong.
“The aggregate balance of the Hong Kong banking system has remained above HK$330 billion ($42 billion). Hong Kong has seen no sign of tightness in market liquidity,” Yue said.
But Yue added that the speed and magnitude of the current US interest rate hike cycle may exert a further negative impact on Hong Kong economy and the city’s property sector.
“The US is expected to lift the interest rates by 2.6 percent in total during the current rate hike cycle, indicating a faster pace and larger scale compared to the previous rate hike cycle in 2018, in which the interest rates were elevated by 2.25 percent,” he noted.
According to Yue, the period during which the interest rates of Hong Kong lag behind its US counterparts will likely be shorter than in the previous cycle, given the potentially faster expansion in interest rate spread and more aggressive capital outflows.
Under the Linked Exchange Rate System in Hong Kong, the Hong Kong dollar interbank rates will move in tandem with US interest rate increases in order to keep the Hong Kong dollar exchange rate stable within the range of 7.75 to 7.85.
“The speed and magnitude of the Hong Kong dollar interbank rates’ catching up with their US dollar counterparts will still be subject to the supply and demand of the Hong Kong dollar funding in the local market,” Yue said.
Heron Lim, an economist at Moody’s Analytics, cautioned that consumption in Hong Kong may not see the same rapid growth that occurred in 2021 because of the US Fed’s accelerated interest rate normalization schedule. And US interest rate hikes will raise borrowing costs in Hong Kong at a time of weak domestic demand, he said
“Commercial banks in Hong Kong will decide on the timing of and magnitude for adjusting their saving and lending interest rates having regard to their own funding cost structure. The public should carefully assess and manage the relevant risks when making property purchase, mortgage or relevant decisions,” the HKMA chief executive warned.
Major banks in the city, including the Hongkong and Shanghai Banking Corporation, Standard Chartered Bank (Hong Kong) and Hang Seng Bank all kept their best lending rate unchanged on Thursday.
Heron Lim, an economist at Moody’s Analytics, cautioned that consumption in Hong Kong may not see the same rapid growth that occurred in 2021 because of the US Fed’s accelerated interest rate normalization schedule. And US interest rate hikes will raise borrowing costs in Hong Kong at a time of weak domestic demand, he said.
Real estate analysts expected the increase of US interest rate will not put immediate pressure on the commercial real estate market in Hong Kong as long as the investors are not highly leveraged financially.
“A large number of funds are all eager to find good opportunities in the market where the competition will counterbalance the potential cap rate expansion. And, geopolitical tensions might boost the inflation rate faster than the interest rate, this is highly likely to keep Hong Kong in negative interest rate territory, where the interest rate is below the inflation rate,” said Hannah Jeong, head of Valuation and Advisory Services at Colliers Hong Kong.
Chiu Kam-kuen, Greater China international director and chief executive at Cushman & Wakefield, said that though the rate hike cycle has commenced and it is clear that the cost of borrowing will trend upward in the years to come, the increase in interest rates by 50 basis points should have very limited impact on the HK property market immediately. “Thanks to abundant liquidity in our banking system, it is widely expected that Hong Kong interest rates will remain at a relatively low level this year.”
The city’s banking sector may benefit from a rate hike amid an ultralow interest rate environment that has lingered for years.
“The interest rate rise by the US Fed will have a positive impact on the net interest margins of Hong Kong banks, which is a bright spot in the current environment. The current economic position in Hong Kong and the uncertainty on growth in the Chinese mainland economy mean that loan growth in the city may be more challenging for banks and that they will need to carefully monitor the credit quality of their loan portfolios,” said Paul McSheaffrey, Hong Kong head of banking and capital markets at KPMG China.