Cash flowing into Hong Kong keeps lending rates down, but for how much longer?
Lending rate divergence may narrow later this year, boosting bank stocks while hurting property developers
The cash that keeps flowing into Hong Kong is keeping interest rates down, say analysts, despite the Hong Kong Monetary Authority’s best efforts to make mortgages more expensive and cool Hong Kong’s red hot property market.
In recent months, money has been flowing into Hong Kong’s capital markets both southwards from the mainland via the stock connect schemes, and from the region more broadly, despite last Friday’s sell off.
This has meant that while the HKMA has followed the US Federal Reserve in raising the base rate three times in the past seven months, the Hong Kong interbank offered rate, or Hibor, has lagged behind the US dollar benchmark, the US dollar Libor (London interbank offered rate).
At the start of this year, three month Hibor and three month Libor stood at broadly similar levels, but as of June 30 the spread had widened to 52 basis points.
The majority of mortgages in Hong Kong are pegged to Hibor , so as that remains low, monthly costs for repaying mortgages also remain low.
There is also no need for banks to change the rates they offer to lenders and savers if so many funds are available.
“The cash flowing into Hong Kong means that interest rates are staying low, even though the HKMA wants them to rise,” said Mark McFarland, chief economist in Asia and the Middle East for private bank UBP.
With lending rates low, Hong Kong’s home prices have remained high, and indebted corporates have struggled less than they might have done, while companies that benefit from higher interest rates, for example banks, will not yet have gained all that they might have hoped for from higher rates.
The total number of deposits in Hong Kong in May – the most recent figures available – reached a record HK$12.2 trillion, marginally up from HK$12.1 trillion in April.
“This pickup in growth cannot be explained by an underlying economic pickup,” said Morgan Stanley analysts in a report.
“There has been some pickup in nominal growth, but not enough to justify such a surge in deposit growth. In our view, this pickup has been driven primarily by the strength in capital markets – and the consequent inflow of capital.”
The analysts see both capital inflows into Hong Kong and Chinese equities and southbound flows via the stock connects as the main drivers of Hong Kong dollar deposit growth.
The crucial question is how long such a gap can be maintained.
The last time the US Fed embarked on a period of interest rate increases was between 2004 and 2007, during which the three-month Hibor-Libor spread widened to as much as 220 basis points.
As such, the Morgan Stanley analysts said the divergence could remain for a while, though they do not expect spreads to rise to that level this time round.
There are two factors that could reduce Hong Kong’s official reserves, said UBS economists in a note.
“Either the Fed turns more hawkish or China generates an overall outflow of capital from
While the US Fed has indicated it will take a softer approach moving forward with just one further rate increase expected by the market, analysts at Nomura said in a note that “there are already some early signs of potentially slower inflows into Hong Kong equities via Stock Connect”.
“We see increased risk that Hibor will start to catch up to US Libor at a faster pace in the second half of 2017.”
For this reason, some analysts are forecasting a fall in Hong Kong property prices as the cost of mortgages start to rise, and corresponding falls in the stock prices of developers.