Rate rise warning spooks investors unnecessarily
The US Federal Reserve last week announced it will leave key interest rates unchanged and the second quarter of quantitative easing will continue as planned until it expires at the end of June.
Fed chairman Ben Bernanke didn't make it clear, at the first-ever press conference held by the Fed after a policy meeting, whether a third round of quantitative easing would follow. But, he indicated that as the recovery had slowed and unemployment rates remained high - against a backdrop of rising oil prices and mortgage default rates - there was a need to maintain near-zero interest rates.
A recent survey showed that 90 per cent of US bond traders believed a Fed rate hike was unlikely before the end of the year. Consequently, US stocks rose, pushing the Dow Jones industrial average to a new three-year high. As the weakness of the US dollar persists, gold and commodity prices continue to hit record highs.
However, Hong Kong stocks have been echoing the downward trend of mainland stocks rather than the upward trend of US shares. And more worrying for investors was the rate hike warning from Hong Kong Monetary Authority chief executive Norman Chan Tak-lam.
Chan said local interest rates might rise earlier than the benchmark rate in the US, amid strong credit demand in the near term. He further cautioned that the eventual rises in the US benchmark interest rates could prompt capital outflows from Hong Kong.
The de facto central banker said he expected that the HK$640 billion liquidity inflow to Hong Kong during the end of 2008 and 2009 would gradually drain away from the city when the US enters a rate hike cycle. His comments inevitably jolted the market and caused a drop in local share prices due to fears that the HKMA may try to indirectly tighten monetary policy.
Chan has been quite vocal in public lately. About three weeks ago, he requested that local banks submit, by the end of last month, their lending and funding strategies for the remainder of the year. It's clear he wants to ensure the banks are not overlending, which would reduce loan quality and raise the level of concentrated risk.
Chan is concerned that the rapid credit growth is unsustainable. According to the authority, bank credit expanded at an annualised 26 per cent in the first two months of this year, after jumping 29 per cent, totalling HK$940 billion, last year - the highest in a decade. The growth was fuelled mainly by property lending and mainland enterprises.
Chan's warning of rate rises and capital outflows was meant to cool investment sentiment, and hence ease mounting inflationary pressure in Hong Kong.
But he shouldn't forget that the primary objective of the authority is to ensure the stability of the local currency and the banking system, as well as being responsible for promoting the efficiency, integrity and development of the financial system. However well-intentioned, Chan's warnings were ineffective and might have caused undue confusion among the public.
Under the current linked exchange rate system, Hong Kong and US interest rates have to move in tandem. If we were to raise rates unilaterally, it would mean abandoning our long-standing commitment to the system, which could have huge consequences.
As head of the authority, Chan must ensure that all local financial activities are conducted in a fair, just and open manner. Unfortunately, his well-intentioned ideas inadvertently brought on the so-called 'Norman Syndrome', which created undue pressure for the market. Coincidentally, the name 'Norman' phonetically sounds like 'take your life away' in Cantonese. That's certainly not an ideal condition for the market.
Albert Cheng King-hon is a political commentator. firstname.lastname@example.org