PBOC challenged as latest Fed credit-cost reduction leaves Beijing way out of line
The latest round of interest-rate cuts will do little to boost Hong Kong's faltering economy and instead will further erode local bank profits, analysts have warned.
The move also threw down the gauntlet to banking regulators in China, Nomura International senior economist Pu Yonghao said yesterday, as mainland credit costs were glaringly out of line with global rates.
The comments came in the wake of another 25-basis-point cut to United States interest rates by the Federal Reserve on Tuesday, which took its targeted Fed Funds rate to 1.75 per cent. The Fed also hinted at more cuts to come in the new year.
In January, the Fed Funds rate - which banks pay for overnight borrowing - was 6.5 per cent.
But in an unprecedented campaign aimed at injecting life back into the US economy, Fed chairman Alan Greenspan has made 11 cuts to the targeted rate this year, bringing it to a 40-year low.
US banks immediately passed on the full benefit of the rate cut to customers by reducing prime lending rates by an equal margin to 4.75 per cent.
But continuing a trend set at the last 50-basis-point cut in US rates on November 6 - which saw local banks pass on only half the reduced rates - Hong Kong banks yesterday once again passed on just half of the latest rate cut to borrowers and reduced prime lending rates 12.5 basis points to 5.125 per cent.
Movements in Hong Kong interest rates mirror those in the US rates via a mechanism through which the Hong Kong Monetary Authority sets a 'base rate' at which it buys back Exchange Fund Bills and Notes from banks through the discount window, to provide banks with temporary liquidity.
The base rate is priced off the Fed Funds rate to support the peg between the Hong Kong dollar and the US dollar - fixed at HK$7.80 per US unit - and provides a benchmark for all domestic rates.
The HKMA yesterday cut its base rate 25 basis points to 3.25 per cent.
Most banks reduced their savings rates by 12.5 basis points.
Since savings rates were already at record lows of 0.25 per cent, this meant banks avoided cutting rates to zero and at the same time managed to maintain the 'spread' between the cost of funds and lending rates.
All big lenders in Hong Kong made identical moves - cutting prime lending rates to 5.125 per cent, and savings rates to 0.125 per cent. Smaller banks bidding to build market share, including Citic Ka Wah Bank - fresh from its takeover of Hongkong Chinese Bank - still offer better savings rates, however.
Citic Ka Wah cut its standard savings rate 12.5 basis points to 0.375 per cent.
HSBC chief economist for Asia Geoffrey Barker said interest-rate cuts could be only one element in the recovery and what Hong Kong needed was a pick-up in exports. 'And I happen to think we are very close to that point, if not there already,' Mr Barker said.
Rate cuts would do little to help the economy, but they were now eroding bank margins, analysts said.
Lagged cuts in rates paid by banks on term deposits - which may be adjusted only once the deposits matured - meant while banks cut lending margins with immediate effect, it took a while before they could reduce deposit rates.
Mr Pu said mainland regulators would now come under pressure to cut rates.
'Presently, the one-year lending rate on the mainland is 5.85 per cent, and the one-year deposit rate is 2.25 per cent - so the rates and the spreads are much higher than the US or the UK,' he said.
This has already led to an appreciation of the yuan on the black market to as high as 8.10 yuan (about HK$7.59) per US dollar from its official exchange rate of 8.28 yuan.
The central People's Bank of China (PBOC) was reluctant to cut rates because of perceived concerns over inflation, Mr Pu said, but the reality was that China was wrestling with a deflationary spiral and needed to cut rates.