Hang Seng slammed for 375-point loss in afternoon trade as the higher cost of money rattles investors
The city’s base lending rate was raised by 25 basis points to 2.25, according to a statement by the Hong Kong Monetary Authority, effective immediately
Hong Kong stocks were slammed more than 375 points lower in mid-afternoon trading on Thursday, led down by losses in the property sector on concerns about tighter mortgage lending after the city’s monetary authority matched the Federal Reserve in lifting its base lending rate by 25 basis points.
The Hang Seng Index dropped 1.2 per cent or 375.10 points in afternoon trade before narrowed down the loss to 0.9 per cent to close at 30,440.17. Properties developers such as Sino Land down 2.2 per cent, Hang Lund Properties down 1.7 per cent and Sun Hung Kai Properties retreating 1.4 per cent.
The Hong Kong dollar was down slightly, easing 0.01 per cent to 7.8478 per US dollar, remaining at the weak end of the currency peg.
The People’s Bank of China did not change its interest rate, reflecting the first time it has not followed the Fed during the current interest rate tightening cycle, according to Iris Pang, economist of Greater China of ING.
“It shows that credit and liquidity are tight in the middle of financial deleveraging reform,” Pang said. “But the signal is loud and clear. The central bank is worried that market risks would escalate.”
Peter Yiu, associate director of Charles Schwab Hong Kong, cautioned of rising market volatility this year, while noting that stocks remain in an uptrend.
“As long as overall financial conditions remain positive, stocks may advance,” Yiu said.
Moody’s Investors Service said that Hong Kong banks will likely show wider margins and better profitability as interest rates rise.
Large Hong Kong banks with broader savings deposits than smaller players would be the biggest winners as their cost of funding remains low while they can still enjoy the widening of net interest margins, said Sonny Hsu, a senior credit officer at Moody’s.
Higher rates should also cool housing demand in Hong Kong, but would be unlikely to incur material losses on the balance sheets of local bank, as mortgage lending has been conservative, Hsu said.
“Generally, we expect Hong Kong’s banks to retain sound liquidity profiles in both the Hong Kong dollar and foreign currencies even if fund outflows persist,” Hsu said.
The city’s base lending rate was raised by 25 basis points to 2.25 per cent, according to a statement by the Hong Kong Monetary Authority, effective immediately.
The US Fed raised its interest rate by the same amount to a range of 1.75 per cent to 2 per cent, the seventh time it has done so since December 2015.
Eight of 15 Fed officials expect at least four rate increases will be needed this year to stave off inflation in the US economy, which implies two more increments in the remainder of this year. Those moves must be matched by the Hong Kong authority to maintain the Hong Kong dollar’s peg to the US currency, which means a higher cost of money in the city that will spill over eventually to higher mortgage rates for the property sector.
Some bankers believe HKMA may use its moral suasion to urge banks to increase their prime rate, which covers most mortgages, credit cards and personal loans in Hong Kong. The increase would help defend the local currency but would be bad news for borrowers.
But HSBC, Standard Chartered Bank, Bank of China Hong Kong, Hang Seng Bank and DBS all announced on late Thursday evening to keep their prime and saving rate unchanged.
Addressing the media on Thursday morning, HKMA chief executive Norman Chan Tak-lam said it is only a matter of time before individual lenders increase their saving rates and prime rates.
“A normalisation of interest rates may bring volatility to the market but it will help the property market to achieve more healthy development,” Chan said.
He said he was unsurprised that the Fed is now forecasting four further rate increases this year, instead of the three previously predicted.
“The US economic growth is solid, the labour market is tight and inflation is looming. It is not a surprise that the US expects to raise the interest rate more. Hong Kong will follow any of these rate rises under the peg,” he said.
Hong Kong’s commercial banks have until now not increased their prime rates, which remain at between 5 per cent and 5.25 per cent. If banks raise their prime rates today, that will be the first move by commercial banks in 12 years.
“They may increase the prime rate in the next few months but not immediately, as there is plenty of liquidity in the financial system,” said Gordon Tsui Luen-on, managing director of Hantec Pacific in Hong Kong. “The many mega initial public offerings have attracted money into Hong Kong, which has cut down the need to raise the lending rate.”
The past six rate increases have led Hong Kong mortgage payments linked to the city’s interbank offered rates, or Hibor, to rise. One-month and three-month Hibor has risen to the highest point in 10 years at over 1.5 per cent, while major banks have to offer high interest rate as high as 2.3 per cent to compete for large-sum deposits.
“The rise of Hibor may also be due to the fact that banks have been preparing to fund the many mega IPOs [in Hong Kong] in the near term,” said Chan. “After that, the Hibor may drop again and the interest rate gap with the US may widen once again. When that happens, it may lead to capital outflow happening again,” he said.
“There is no need to worry, as this would be normal under the system of the peg. When the banks increase their prime and saving rates, the outflow will stop.”
Explainer: What Hong Kong’s interest rate increase means for Hibor, prime and mortgages
What is the base lending rate?
It is the interest that banks pay on money they borrow from the Hong Kong Monetary Authority. Individuals or companies do not borrow money at this rate.
How do higher base lending rates affect mortgage rates in Hong Kong?
It doesn’t have a direct effect as almost all mortgage rates are either linked to Hibor (the Hong Kong Interbank Offered Rate), or linked to prime rates, which are set by banks. The city’s biggest lenders such as HSBC, Bank of China (Hong Kong), and Hang Seng Bank have a prime rate of 5 per cent. Standard Chartered and Bank of East Asia set their prime rate of 5.25 per cent.
How are Hong Kong’s mortgage rates priced?
Two options are available:
1) Hibor plus a percentage (the best advertised rates are normally 1.3 per cent), or
2) Prime minus a percentage (the best advertised rates are around 2.85 per cent, or 3.1 per cent, depending on which prime rate a bank uses).
What’s the advantage or pitfall of each option?
Hong Kong’s banks have not changed their prime rates since the 2008 global financial crisis, but Hibor changes every day, as it reflects the interest rates banks charge other banks.
As the base rate rises, and banks have to pay more to borrow from the HKMA, it’s fair to expect banks to charge each other higher rates.
The past six rate increases have led Hong Kong mortgage payments linked to the city’s interbank offered rates, or Hibor, to rise. One-month and three-month Hibor has now risen to the highest point in 10 years at over 1.5 per cent.
As Hibor rises, do mortgage payments get more expensive?
Yes, up to a point. However, most borrowers’ Hibor-linked mortgages include a clause which says that if their repayments are greater than they would be on a prime mortgage, they automatically switch to a prime-based payment scheme. We reached that point last year, so repayments have not risen that much.
Hibor (about 1.5 per cent) + 1.24 per cent = 2.74 per cent.
Prime - 3 per cent = 2.15 per cent.
When will the banks raise their prime rates?
Some analysts believe they will do so in the next few months, but not necessarily straight away as liquidity is high. Hong Kong’s string of huge IPOs has kept money pouring in to the financial system and this has reduced the need to raise borrowing costs.
When lenders do eventually raise their prime rates, it will be the first move by commercial banks in 12 years.
What are the historical prime rate movements?
The current prime rate in Hong Kong of 5 per cent is the lowest on record and hasn’t changed for 10 years. The record highest was 19.61 in 1981.
The last time major banks increased their prime rate was in March 2006, when they raised it by 25 basis points to 8 per cent.
In the wake of the global financial crisis came a rate-cutting cycle. The last time the banks changed their rate was in November 2008, when it was lowered by 25 basis points to the current level of between 5 per cent and 5.25 per cent.