There is no escaping Asia's very low interest rates

PUBLISHED : Tuesday, 04 February, 2003, 12:00am
UPDATED : Tuesday, 04 February, 2003, 12:00am

THERE IS NOT MUCH escape elsewhere in Asia at present from very low interest rates in Hong Kong. Look where you will, the currency and other risks in the region offset the gains you might make from higher rates outside Hong Kong's borders.

Hong Kong's interest rates are lower on average than in other Asian economies but rates elsewhere have fallen more than they have in Hong Kong.

As the first chart shows, the weighted average of Asian three-month interbank rates (or the nearest proxy) have tumbled all the way from 15 per cent at the beginning of 1998 to just 3.8 per cent at present and the trend continues steadily down.

In part this is because US dollar interest rates have declined and Asia remains very sensitive to these, but it is also because confidence remains weak across the region and not only because of the threat of war in Iraq. The aftermath of the 1997-98 Asian financial crisis still overhangs economic performance in much of the region.

Take those interbank rates country by country as the bar chart does and you know immediately that even if you could get money into Indonesian rupiah interbank instruments you would be taking an enormous risk. That 13.46 per cent hardly beckons when there is still no real foundation under the rupiah's exchange rate and double digit inflation indicates further currency weakness to come.

Ditto for the Philippines where the peso is still steadily losing ground against the US dollar. Inflation has been tamed for the time being at 2.6 per cent on the consumer price index but the real danger here is a government losing control of its fiscal balances to an extent that could seriously destabilise financial markets. The Philippines is not a worthwhile alternative to Hong Kong for higher interest rate returns.

South Korea may seem a more likely choice with a won interbank rate of 4.56 per cent and deposit rates not much lower, particularly with the won strengthening against the US dollar, but foreigners will never take advantage of this in any size, not with a Korean government still doing its best to dissuade foreign currency inflows to stop the won from rising too far against the Japanese yen.

Malaysia is even more of a closed market. It officially maintains capital controls, although somewhat porous ones, and the usual rule when capital controls are present is to get your money out if you can, not in. There is evidence that Malaysians continue to observe that rule where they can.

If it is a good rule for Malaysia it is an even better one for China. It is impossible in any case to get a reliable interbank rate for the yuan in the absence of a market-based financial system. The 2.97 per cent I have quoted here is actually the three-month working capital lending rate.

Thailand is much more open and, with a property market showing some signs of revival at last, may even beckon other investments to the truly risk-minded. Interest rates, however, are not sufficiently better than in Hong Kong to make it worth the bother for the currency risk involved.

And then, with interbank rates even less than Hong Kong's, we get Taiwan, Singapore and Japan with deposit rates that only in the case of Taiwan are any better. The difference would yield you a handful of coins, much less than the price you would set on the bother of getting in.

Let's face it. If you do not like Hong Kong's interest rates for your money then your only real alternative is US dollar deposits. Failing that you can look for slightly higher yields on US dollar fixed-income instruments or put your money at risk in the stock market, which may not be a bad idea at present share price levels.

There is no getting away from it. Returns on money instruments are either low or risky wherever you go, unless deflation gives the value of your money a boost, and if you want interest income you will just have to sit this one out and wait for things to change.

Graphic: jake04gbz