Fed rate rise sparks caution in China as Hong Kong braces for cash outflow

PUBLISHED : Thursday, 17 December, 2015, 7:46am
UPDATED : Friday, 18 December, 2015, 3:02am

Beijing and Hong Kong reacted with caution to the US Federal Reserve’s decision to raise interest rates for the first time in almost a decade, which sparked a global rally in stocks and pushed up the US dollar.

The US central bank raised its benchmark rate by 25 basis points, ending the near-zero interest rate regime that has flooded the world with cheap money and inflated asset values across the board.

“The Fed rate hike will have some direct or indirect impact on China’s external trade and international investments. Further analysis is required to determine the extent,” Chinese commerce ministry spokesman Shen Danyang said yesterday.

READ MORE: Hong Kong’s property market downtrend to last for 2 to 3 years as Fed continues policy tightening

Hong Kong Monetary Authority (HKMA) chief executive Norman Chan Tak-lam said investors need to prepare themselves for shock in stock and property markets as the Fed move ends the era of easy money.

“A prolonged period of low-interest-rate environment in the US has led to US$130 billion of capital inflows to the city over the past few years. This money will start flowing out as the US normalises its interest rate cycle,” Chan said.

“The public would need to carefully prepare themselves for the shock in the investment markets due to more interest rate rises,” he said.

Chan said the rate rise will add to the cost of homeowners but added the HKMA has no plans to relax the property curbs imposed in recent years to cool down the sizzling market.

His remarks came after the HKMA raised base rate by 25 basis points to 0.75 per cent, the first rise since June 2006.

The Fed signalled that further rate rises will likely be slow, prompting stocks in the US, Hong Kong, Shanghai and other regional markets end 1 to 2 per cent higher, with banking shares being the biggest gainers.

The yuan, however, weakened to the US dollar and fell to a fresh low in four and a half years. All other major currencies, such as pound, euro and the Australian dollar, weakened against the US dollar. The US currency climbed 1 per cent, its biggest rise in over a month.

Commodities hit a 16-year low, with spot gold extending recent losses. Last night it fell 2 per cent to two-week low of US$1,050 an ounce.

Andrew Fung, executive director of Hang Seng Bank, said he expected the US Fed rate may increase to 2 per cent by 2017 but local bank rates will stay the same for six to nine months as they still have ample have liquidity.

HSBC, Hang Seng Bank, Bank of China Hong Kong did take the cue from HKMA, keeping their best lending rate at 5.25 per cent and deposit rate at zero.

Brett McGonegal, chief executive of investment firm Reorient, said: “Unfortunately for Hong Kong, the biggest loser in the rate-rise scenario is the property market. Property prices will come down in the near term.”

Other property analysts said Hong Kong’s housing sector downtrend will last two to three years, with home prices likely to fall five to 10 per cent.