Hong Kong’s low-interest rate regime will help the city’s stricken economy get back on its feet quickly

HKMA is likely to keep its interest rate unchanged after the Federal Reserve indicated that its rates will remain close to zero until the end of 2022
A total of HK$48.1 billion has flowed in Hong Kong market since April, forcing the HKMA to intervene 16 times in the market to defend the peg

Hong Kong Monetary Authority (HKMA)

Enoch Yiu

Published: 2:10pm, 11 Jun 2020

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The Hong Kong Monetary Authority will follow the US Federal Reserve in keeping interest rates close to zero through 2022 to support the battered economy, a strategy that is set to attract fund inflows into the city despite concerns surrounding the proposed national security law and the coronavirus pandemic, according to analysts.

The de facto central bank left the base rate unchanged at 0.5 per cent on Thursday morning, just hours after the US Federal Open Market Committee decided to keep the Fed funds rate at zero to 0.25 per cent and indicated no change through 2022.

Under the peg-linked system, Hong Kong will follow in lockstep with the interest-rate policy of the US, which means interest rates in the city will stay close to zero through 2022, said Bruce Yam, currency strategist at Everbright Sun Hung Kai.

“[This means] low-funding cost for individuals and corporates, [which] will help reboot the economy,” Yam added.

A low-interest rate regime is very much needed for businesses in the city, as the economy contracted by 8.9 per cent year on year in the first quarter, the worst since records started in 1974. To help businesses tide over the crisis the HKMA has requested banks to give over 30,000 Hong Kong companies a six-month repayment holiday on HK$380 billion (US$49 billion) worth of loans.

The 50 basis points interest-rate gap between the central banks’ rates in Hong Kong and the US has led to traders parking their funds in the city in so-called carry trades. The carry trade has lost some of its sheen since March when the one-month Hibor (Hong Kong Interbank Offered Rate) was 130 basis points higher than its US counterpart, which has since narrowed to about 60 basis points premium this week.

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Eric Tso Tak-ming, chief vice-president of mReferral Corporation, said capital inflows and low interest rates will continue to support the local property market. He said that Hibor-related mortgage rates have fallen by one percentage point since April, allowing borrowers to save about HK$1,894 a month based on a typical HK$5 million mortgage loan with a 30-year tenure.

The extension of the zero-interest-rate era to 2022 is likely to bring more hot money inflows into the city and keep the peg at the strong end of its range, which in turn will further hurt short sellers who try to break the currency link. The last time when the US pushed interest rates close to zero, an estimated US$130 billion flooded into the city between December 2008 and the end of the Fed’s quantitative easing measures seven years later, as rate cuts meant to salvage the American economy fuelled asset prices here.

During that period, the Hong Kong dollar tested the upper end of the peg’s range repeatedly, prompting multiple interventions by the HKMA, a scenario which has been repeated many times this year.

Hong Kong has already seen HK$48.1 billion (US$6.2 billion) of capital inflows since April, pushing the Hong Kong dollar exchange rate to rise above 7.75 per US dollar and forcing the HKMA to step into the foreign exchange market 16 times between April 21 and Thursday to bring the currency back within the 7.75 and 7.85 trading band.

But some investors, including US fund manager Kyle Bass, have been shorting the Hong Kong dollar since last year in a bid to break the peg, which has been in place since 1983. The founder of Hayman Capital Management plans to use options contracts with 200 times leverage, betting the peg will break in the next 18 months, according to a recent Bloomberg report. A Hayman Capital spokesman said the company was “not in a position to comment at this point” in an email inquiry by the Post.

Arthur Yuen Kwok-hang, deputy chief executive of Hong Kong Monetary Authority. Photo: Jonathan Wong

“The data speaks for itself,” said Arthur Yuen Kwok-hang, deputy chief executive of HKMA. “The short sellers of the Hong Kong dollar over last year have had their fingers burnt, expecting the Hong Kong dollar to go down further, but in fact the local currency has strengthened to the top end of the peg after the massive hot money flow in recent months to chase the red hot IPOs.”

Yuen declined to comment on Bass’s new bet or the details of losses suffered by the short sellers, only highlighting that the Hong Kong dollar has strengthened by over 1 per cent from 7.84 per dollar a year ago to 7.75 recently.

He added that the capital inflow is likely to continue as there are many IPOs in the pipeline. Many US listed mainland tech firms are looking to list in Hong Kong after US politicians look to fence off Wall Street from Chinese companies amid rising US-China tensions.

Yuen said the data shows there has been no capital outflow even after the national security law had sparked fears that some investors would rush to exchange their Hong Kong dollars into US dollars.

This article appeared in the South China Morning Post print edition as: HKMA’s low-interest-rate strategy ‘will speed up recovery’

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