Federal Reserve

Fed lift-off unlikely to trigger rapid outflows from Hong Kong

Negative impact seen ‘limited’ on Hong Kong’s property and equity prices in the short term as the Hibor rates may not rise rapidly

PUBLISHED : Thursday, 16 March, 2017, 8:06pm
UPDATED : Thursday, 16 March, 2017, 10:55pm

The Federal Reserve’s third rate rise in a decade is unlikely to trigger massive capital outflows from Hong Kong and a rapid rise in the city’s interest rates, thus the negative impact will be limited on Hong Kong’s asset prices in the near term, said investment managers and analysts.

Hong Kong’s currency is pegged to the US dollar, which means the city has to follow US monetary policy. But concerns are growing that Hong Kong’s weak economic outlook could take another hit if forced to raise interest rates. A higher rate also tends to add pressure to Hong Kong’s equity market and property prices.

Hong Kong Monetary Authority, the city’s de facto central bank, raised Thursday the base interest rate by 25 basis points to 1.25 per cent. Commercial banks in the city have the flexibility to choose if they want to immediately match the increase.

“It’s inevitable that interest rates [in Hong Kong] will rise gradually resulting from the US rate increase,” said Chordio Chan Siu-ping, head of investment management at Bank of China Hong Kong.

As the Fed signals it will continue to normalise the interest rates, money could leave Hong Kong for the US in search of higher yields.

“But massive capital outflows are unlikely in the short term,” Chan said.

“I won’t worry about that.”

Chan said the Fed is unlikely to act aggressively this year, as the US economic momentum is not strong enough, therefore capital outflows will be slow and gradual.

He expected the Fed to increase rates no more than three times in 2017.

The impact of the Fed’s rate rises on Hong Kong’s money market will also be limited, as Hong Kong banks are sitting on ample Hong Kong dollar liquidity and have room to delay the increase.

Chan expected Hong Kong banks to start increasing rates next year.

“The aggregate balance in Hong Kong banks amounts to HK$260 billion (US$33.49 billion), and this is just a conservative estimate,” Chan said. “If including the outstanding amount of Exchange Fund Bills, Hong Kong lenders are probably equipped with around HK$1 trillion.”

“Even if capital flows out of Hong Kong, chances are small that the benchmark Hibor [Hong Kong Interbank Offered Rate] will rise rapidly, as the city’s financial system has enough liquidity,” Chan said.

That could be positive news to property borrowers, as most mortgage loans in Hong Kong are priced against Hibor, the interbank lending rates in Hong Kong dollar.

“Hong Kong’s housing market will not be affected directly this time, as Hong Kong banks don’t have to immediately follow the US with rate increases,” said E Zhihuan, chief economist for BOC Hong Kong.

She added that the negative impact will also be limited on Hong Kong’s economy, as the Fed seems unlikely to take an aggressive stance in rate tightening this year.

“The US economic data are good, but not that good,” E said. “Besides, Trump faces debt ceiling constraint for his expansionary policy plan. There is still some way to go before the measures can be carried out.”

“Chances are low that the Fed will raise rates in June. If that’s the case, there will only be two rises this year,” she added.

Kinger Lau, chief China equity strategist and managing director for Goldman Sachs, expected Hong Kong housing prices to fall 15 per cent to 20 per cent by the end of 2018, as interest rates will gradually rise.

However, he agreed that the short term impact is limited on Hong Kong’s property market resulting from a US rate increase.

“It takes at least six months for Hong Kong interest rates to follow the US, ” he said. “Hong Kong banks still have a big aggregate balance now, so they can delay the increase.”

“The impact [of the Fed’s tightening] on housing prices will be more obvious next year,” Lau added.

As for equity markets, Lau said Hong Kong stocks will be even less affected, as the rapid growth in southbound flows will support equity prices even if overseas funds pull out of Hong Kong.

So far this year, US$8 billion has flowed into the Hong Kong stock market from mainland China, according to Goldman Sachs.

Lau forecast the annual southbound flows will reach US$50 billion for this year and 2018 respectively, driven by Chinese investors’ increasing need to hedge yuan risks and rising demand for Hong Kong equities.

“Overseas funds are underweight Hong Kong stocks currently. But as China’s economic outlook improves and concerns ease about a hard landing, they will come back to Hong Kong, ” Lau added.