'No exit strategy' in Hong Kong as rise in US interest rates looms

City regulators have few options ahead of a Fed tightening expected to cool property market

PUBLISHED : Monday, 09 November, 2015, 11:45pm
UPDATED : Monday, 09 November, 2015, 11:45pm

When the US Federal Reserve dropped interest rates to near zero in late 2008, it was not planning for the cost of borrowing to stay so low for so long in markets such as Hong Kong, said a former Fed governor who was part of the decision to lower rates and launch a massive bond-buying strategy.

The first uptick in US rates, which looks increasingly likely next month, will leave Hong Kong regulators scraping for exit strategies from a policy over which they have no control.

"At the end of 2008, no one thought that we would be debating in 2015 or 2016 when the first increase in rates would occur," Randall Kroszner, a member of the board of governors at the Fed at the onset of the global financial crisis, said in an interview with the South China Morning Post.

"I don't think we foresaw that the rest of the world would be coming down close to zero and be doing this for the next five to six years. That aspect was not seen then."

Kroszner resigned from the Fed in early 2009 and is now a professor at the University of Chicago's Booth School of Business.

A rise in interest rates in the United States has major implications for Hong Kong by way of the local currency's peg to the US dollar.

Rock-bottom rates have in part led to a prolonged property-market boom that has seen prices rise by 150 per cent over the past seven years. As borrowing becomes more expensive, housing purchases will cool off and prices will likely follow.

Jefferies said in a recent report that at the end of August, banks began trimming property valuations by 2 to 15 per cent. Last month, CLSA predicted a 17 per cent price drop in the next 27 months.

The speed at which prices fall will depend largely on how fast the Fed increases rates. Policymakers in Hong Kong could only hope to accommodate the changes, experts said.

"There is no exit strategy," said Silvia Liu, a Hong Kong-based economist at UBS. "Hong Kong is basically just responding to what the Fed does."

The property market is not the only concern. Increased rates meant Hong Kong's debt-service burden would drag on economic growth, Liu noted.

So, too, will an increasingly strong US dollar and a depreciating yuan.

If the Fed increased the rate in December, as many analysts expect, the rate was unlikely to jump by more than 1 percentage point within a year, Kroszner said.

Judging by the end last year of quantitative easing, in which the Fed bought up more than US$4.5 trillion in assets such as treasury bonds, the impact of a slow rate rise could be mild in Asia, he added.