Hong Kong’s monetary authority should raise interest rates now to buffer the market – while it can
Andy Xie says the Hong Kong property market is set to stumble, and the US may return its interest rates to the ‘90s-era 5 per cent average. The HKMA should therefore raise its own interest rates; not doing so only serves Hong Kong’s property cartel
After 1997, Hong Kong’s property price dove by 75 per cent over the following six years. The political pressure forced the government to contract supply, which massively exaggerated the subsequent upcycle, causing political pressure on the other end.
One strange thing happened on the way up in the current cycle. While the US interest rate has been rising for over one year, Hong Kong has chosen to keep a near-zero interest rate while allowing the exchange rate to slide.
The Fed is expected to raise interest rates at least twice more to 2 per cent. As the US economy may be overheating, the Fed could raise it more, possibly to 2.5 per cent. And, the Fed rate will keep rising, possibly to 4 per cent in 2019. In the long term, the dollar interest rate is on the way up. As globalisation unwinds, expect inflationary pressure.
The odds are that an interest rate shock is coming. By keeping the exchange rate at the lower end, the HKMA could punish speculators by pushing the rate back to the high end, causing them a 1.3 per cent capital loss. When the interest rate difference is insufficient for compensating for this potential loss, then Hong Kong’s interest rate can remain at zero. But as the dollar interest rate continues to rise, the tipping point for speculators to go all out will be soon reached, pushing the Hong Kong dollar interest rate all the way up to the US dollar level.
It would feel like 1997-98 all over again, though, this time, it would all be self-inflicted.
If Hong Kong wants to soften the blow, the HKMA should keep buying the Hong Kong dollar until Libor and Hibor – Hong Kong’s interbank offered rate, the short-term borrowing cost of funds between commercial banks – reach parity. It should stop buying only when the exchange rate reaches the upper end. Anything else should be considered a continuation of the effort to keep interest rates artificially low to abet the property developers.
As finance becomes a sunset and low-margin industry, how could Hong Kong support its high property prices? Its household debt is 70 per cent of gross domestic product, compared to 50 per cent in 1997. Will all the mortgages be paid off?
Andy Xie is an independent economist