China Economy

Hong Kong set to enjoy economic tailwinds in the 2nd half, but beware of housing risks, BOCHK says

BOC Hong Kong Holdings says an improving global outlook and low interest rates add up to good economic news for Hong Kong during the second half, but warns of risks from inflated housing market

PUBLISHED : Wednesday, 28 June, 2017, 7:03am
UPDATED : Wednesday, 28 June, 2017, 7:03am

Hong Kong should enjoy economic tail winds in the second half, thanks to an improving global outlook, although extremes in the housing market raise the possibility of unforeseen shocks, according to BOC (Hong Kong) Holdings.

Hong Kong’s GDP growth will likely pick up to 2.8 per cent this year, near the upper end of the government’s forecast range, said BOCHK, the Hong Kong-listed arm of Bank of China and one of the city’s largest lenders.

In a presentation on Tuesday the banks said an improved global outlook will help boost trade activity while ultra-low interest rates will continue to support the housing market and other asset prices.

Last year, Hong Kong’s economy grew 2 per cent, thanks in part to a pickup from the second half.

The upturn in activity will also spill over into the city’s benchmark Hang Seng Index, which will likely gather momentum to close in on the 27,000-point level, the bank said.

Earlier this month, the Hong Kong government maintained its previous GDP growth forecast of 2 per cent to 3 per cent for 2017.

We need be prepared for a sudden fall in the property market
Ricky Choi, senior economist for BOCHK

“Hong Kong’s trade will benefit from a stronger momentum in the global economy,” said E Zhihuan, chief economist for BOCHK.

The International Monetary Fund recently raised its forecast for global growth to 3.5 per cent this year and 3.6 per cent in 2018, due to buoyant financial markets and a long-awaited cyclical recovery in manufacturing and trade.

“Expectations are also high that US President Donald Trump’s policy plan will boost growth, including tax reform, financial regulatory easing, and infrastructure spending,” E said.

She noted that China’s economic growth accelerated to 6.9 per cent in the first quarter, indicating that the Chinese economy has stabilised.

For the full year E expects the Chinese economy to grow 6.7 per cent, while the yuan will close the year at 6.85 to 6.9 per US dollar, little changed from its current level.

She said Hong Kong’s domestic demand will also remain resilient, supported by the low interest rate environment, which is beneficial for local asset prices.

“In the short term, liquidity still remains ample in the market, allowing Hong Kong banks to resist the need to follow any interest rate tightening moves in the US,” E said.

Hong Kong’s commercial banks make their own decisions about whether or not to adjust the interest rates they provide to savers and borrowers. Hong Kong banks have yet to follow the US Federal Reserve, which kicked-off its rate-tightening cycle on December 2015, when it lifted its target rate for the first time in nine years.

BOCHK is also fairly upbeat about the city’s stock market, anticipating the Hang Seng Index will soon approach 27,000 on the back of ample market liquidity and better-than-expected corporate earnings.

The upcoming Bond Connect scheme will also boost trading volumes in the Hong Kong market.

BOCHK estimated that average daily turnover this year will increase to HK$75 billion (US$9.61 billion), up 12 per cent from HK$67 billion last year.

“This year marks the 20th anniversary of Hong Kong’s return to China. We expect Hong Kong’s role to strengthen in facilitating China’s opening-up and financial reforms,” E said.

In 2016, Hong Kong topped global markets in terms of funds raised through initial public offerings (IPOs), raising HK$195 billion, followed by the Shanghai Stock Exchange.

Hong Kong tops global IPO markets despite total funds raised sliding to eight-year low

BOCHK says this year total funds raised through IPOs in Hong Kong will likely reach HK$190 billion thanks to continuing interest by mainland Chinese companies.

However, Ricky Choi, senior economist for BOCHK, warned of risks in the property market.

Home prices in Hong Kong have jumped nearly 20 per cent since last April.

“This strong momentum is not sustainable,” Choi said. “The current price level and housing affordability ratio are too high.”

He expected home price growth to slow in the second half, easing to around 8 per cent annually.

Hong Kong has one of the world’s most expensive housing markets, with home prices nearly 90 per cent above their previous peak in 1997.

“The big trend is that interest rates will gradually rise in the longer term. The land supply is also rising,” Choi said.

He cautioned that the government and the Hong Kong Monetary Authority will also continue to tighten regulatory policies.

“We need be prepared for a sudden fall in the property market in case the external economy and financial markets are hit by any unpredictable event,” Choi said.