Federal Reserve

Era of cheap money for Hong Kong and the mainland has to end

US Federal Reserve is expected to raise interest rates three times next year and, as long as they are implemented gradually, they should prove positive

PUBLISHED : Thursday, 28 December, 2017, 1:07am
UPDATED : Tuesday, 03 July, 2018, 9:47pm

The latest interest rate rise in the United States is a good example of why most investors loathe to see the back of outgoing Federal Reserve chairwoman Janet Yellen. It was announced with barely a ripple across capital markets, a trick she has managed to do five times during her tenure since 2014. Next year, with her successor Jerome Powell at the helm, life in the markets may not be so easy. Hong Kong, with its peg to the US dollar, and mainland China, with its intricate trade ties to the US economy, will have to pay close attention.

Hong Kong raises rate, but gets a shrug from markets and borrowers

After the US move, the People’s Bank of China raised its own market rates up a notch as a response to the general market uptrend and to reduce financial leverage. Likewise, the Hong Kong Monetary Authority mirrored the US by raising the base lending rate by 25 basis points to 1.75 per cent.

Barring unforeseen disasters, rates will continue their uptrend in coming years. The trillion-dollar question is whether this interest rate normalisation – with the Fed continuing to shrink its massive balance sheet by offloading assets – will be such smooth sailing under Powell. The US economy is enjoying positive momentum in both growth and employment. This gives ample room for rate rises. The Fed says it expects to raise rates three times next year, the same as this year. Powell is considered a safe pair of hands who will continue the gradual rate normalisation started by Yellen.

Still, some analysts have warned next year could be an inflection point for the global economy. The world’s leading central banks have expanded their balance sheets by a total of US$15 trillion in the past decade while keeping unprecedented low rates. A more aggressive pace on rate hikes by the Fed and ending quantitative easing by the European Central Bank next year could throw markets off balance.

How late will China be to the Fed-led interest rate-raising party?

But ending the era of cheap money is a must for Hong Kong and the mainland. With ample liquidity, the city’s banks have held lending rates constant despite the latest HKMA rate hike. But the city needs higher borrowing rates to cool its housing market, which has the dubious distinction of being the world’s most expensive and has caused serious political and social problems. A gradual but rising interest rates programme by the Fed will be a positive factor for Hong Kong in this regard.

Beijing has made financial stability a primary policy goal. But, as the International Monetary Fund has noted following a comprehensive examination of the mainland’s financial system, the tensions between promoting growth and employment at lower government levels and reining in financial risks and leveraging remain. Like the rest of the world, China’s economic policymakers have a daunting task ahead.