Hong Kong’s economy to wobble as US-China trade war, high interest rates take their toll, says Standard Chartered
The bank becomes the latest to downgrade its forecast for the city’s GDP growth, with trade tensions and interest rates on the rise
Standard Chartered downgraded Hong Kong’s full-year economic growth forecast from 3.8 per cent to 3.6 per cent on Wednesday.
The bank cited the US-China trade war, the likelihood of further interest rate rises, an expected slowdown in exports, and disappointing growth in the second quarter, in its “Global Focus – Q4 2018” report.
The bank also expects slower growth in 2019. It sees the city’s gross domestic product expanding 3 per cent, less than its previous estimate of 3.4 per cent, and expects it to stay at that level in 2020.
The adjusted forecast by Standard Chartered comes after Bank of America, Bank of East Asia, Citigroup and HSBC all cut their outlooks for the city’s GDP in recent days, following the most recent escalation of trade tensions between the US and China.
On Wednesday Bank of America Merrill Lynch downgraded Hong Kong’s GDP growth forecast from 4 per cent to 3.8 per cent in 2018, and from 3 per cent to 2.7 per cent next year.
It downgraded eight out of 12 APAC countries’ GDP growth forecasts for 2019.
“We expect such an escalation of trade tensions between the US and China to put downward pressures on China’s growth, with negative spillover to the rest of APAC,” it noted in a global research report.
DBS Bank remains the most bearish in Hong Kong, maintaining its forecast of 3.3 per cent for 2018, already below the revised forecasts of the other lenders.
The US has placed tariffs on some US$250 billion of Chinese-made goods as President Donald Trump seeks to stop Beijing engaging in what he claims are unfair trade practices, including the forced sharing of technology.
While many analysts have said the trade dispute will cause a slowdown in China, they have until very recently been less certain about the potential impact on Hong Kong even though huge volumes of Chinese goods pass through the city on their way to other locations, including the US.
Hong Kong’s exports are likely to be affected by the trade war later this year, according to Standard Chartered’s report despite a healthy performance as recently as July when they increased 10 per cent year on year.
“Hong Kong has a lot of trade where it re-exports from China, so in an event where you have the US and China going head to head, we expect trade flows to decrease between the countries and that is certainly going to have an impact on Hong Kong. The logistics sector and the re-export sector will get hit,” said Eddie Cheung, Asia foreign-exchange strategist at Standard Chartered Bank Hong Kong.
There is no comfort to be taken from the recent signing of new trade agreements between the US, Canada and Mexico, according to James Hughes, chief market analyst at AxiTrader in London.
“This is not a trade conflict like that of the US and Canada, and therefore we cannot say that the US is in a deal making move,” said Hughes. “The deteriorating relationship between China and the US will not be easily repaired, which for me means we will see more tariffs before this situation gets any better.”
The earliest movement on a deal between China and the US could be in November when President Trump is expected to meet Chinese President Xi Jinping at the G20 summit in Buenos Aires.
“Global trade outlook continues to look challenging as China-US trade tension shows no sign of easing. Hong Kong – as a major entrepôt for mainland China – is another indicator for broader regional trade and a more sensitive indicator as well,” HSBC said in a recent research note.
“Indeed, almost all of Hong Kong’s exports are re-exports of one kind or another, with 54.5 per cent and 58.1 per cent of these re-exports to and from China respectively in 2017.
“The US$50 billion reciprocal tariff recently imposed may not only have started to slow overall trade flows, it could also affect other economic sectors pertinent to trade, such as logistics and financial business services, the two important pillars of Hong Kong’s economy. Further escalation could lead to an even bigger impact.”
In recent months the Hong Kong Monetary Authority has increased the base lending rate, the interest it charges commercial banks, in line with raises by the US Federal Reserve.
This has prompted commercial banks to increase their lending rates for the first time in over a decade. Last Thursday, HSBC became the first in Hong Kong to raise its prime rate, after the HKMA raised its base rate by 25 basis points to 2.5 per cent, effectively ending an era of cheap money.
“There are still diverging interest rates between the US and Hong Kong, but Hong Kong interest rates are on the way up,” said Cheung.
According to the report, the Hong Kong Interbank Offering Rate (Hibor) – the short-term borrowing cost of funds between commercial banks – is likely to go higher as long as the Fed continues to push up its interest rates. The three-month Hibor is expected to reach 2.6 per cent by the end of the year, 3.4 per cent at the end of 2019 and 3.2 per cent at the end of 2020.
Private consumption was the main driver of GDP growth in the second quarter. Domestic demand is likely to continue to energise the economy, said Standard Chartered, as the city posted its lowest unemployment rate in more than 20 years – 2.8 per cent at the midyear point.
But while consumer confidence remains intact for now, there is room for it to soften, said Cheung.
“If consumer confidence is not there, that has an impact on retail sales, consumption, and ultimately that will feed through into GDP,” he said.
In China, the rising tension with the US and a slowing of housing market growth will continue to hit the economy.
The bank expects GDP growth to drop to 6.6 per cent for the whole of 2018, from 6.9 per cent last year. In 2019, the forecast is for 6.4 per cent growth, slipping to 6.3 per cent the following year.
Bank of America Merrill Lynch, however, kept this year’s China GDP growth forecast stable at 6.6 per cent, but downgraded 2019 from 6.4 per cent to 6.1.
“The new round of tariff hikes will pose modest headwinds to China’s GDP growth in 2018, given the tariffs are only effective in late September. However, we believe the impact would be more significant in 2019,” stated the bank’s report.
According to Standard Chartered, China’s housing market is expected China’s housing market is expected to slow throughout early 2019. While strong land sales make new housing and housing investment seem strong, actual construction is dropping, according to the Standard Chartered report. The growth in the amount of floor space sold, meanwhile, slowed to 2.8 per cent in August from an average 8.4 per cent over the previous three months.
In September the government’s official manufacturing purchasing managers index in China fell to 50.8, weakening more than analysts expected and reflecting a potential slowdown in the Chinese economy as the trade war gathered steam.
“Deterioration of PMI in September is in line with our expectation that coincident growth indicators will get worse before getting better,” Bank of America Merrill Lynch economists Sylvia Sheng and Helen Qiao said in a research note this week. “As US-China trade conflict intensifies, we expect China’s policymakers to step up monetary and fiscal easing to soften the blow from higher tariffs.”
Similar to Hong Kong, consumption has helped stabilise China’s momentum, contributing 71 per cent of GDP growth in the first half of the year, up from 46 per cent five years ago.