Hong Kong banks 'hold their breath' on Fed rate meeting

Hong Kong's financial markets brace for potential increase in the US federal fund rate but financial secretary says banks balance sheets in good shape

PUBLISHED : Tuesday, 27 October, 2015, 1:24am
UPDATED : Tuesday, 27 October, 2015, 1:24am

Hong Kong's financial secretary John Tsang Chun-wah yesterday acknowledged the growing concern for Hong Kong's financial markets as the US Federal Reserve convenes a meeting today to discuss a potential interest-rate increase.

"Most of us are holding our collective breath in anticipation of the announcement after the US [Federal Open Markets Committee]'s two-day meeting," Tsang said at a Hong Kong Association of Banks luncheon.

FOMC will kick off the meeting in Washington DC to deliberate on the timing for its first increase in the fed rate in almost seven years. The Hong Kong dollar's peg to the US dollar virtually imports US monetary policy, leading to worries at banks over an increase in bad debt as the cost of borrowing rises.

The slowdown of the Chinese economy as well as the turbulence in the mainland equities market since June has shaken Hong Kong banks, which have rapidly boosted their cross-border lending to mainland Chinese firms over the past three years.

But Tsang lauded the strength of local banks and their implementation of global banking regulation such as Basel III. He noted that the average capital adequacy ratio at local banks was 17.5 per cent, about twice the global requirement.

"In spite of all the recent turmoil in global financial markets, the local market is continuing to operate in a smooth and orderly fashion," Tsang said. "I take comfort in that and have not seen any liquidity problems in our banking system."

Tsang has estimated that Hong Kong's gross domestic product will grow by 2 to 3 per cent this year. China notched up 6.9 per cent growth between July and September, the slowest growth since the global financial crisis.

Some analysts have been less sanguine on Hong Kong's ability to weather both a slowdown in China and a gradual rate rise in the United States.

"The headwinds for Hong Kong, even if we factor in a very gradual tightening cycle, are still underestimated," UBS economist Silvia Liu said in a report in August.

The Fed has deferred raising the rate several times this year and many analysts say there is little chance it will move this month as US employment and economic growth are still weak.