Challenges for Hong Kong as China, US widen the gap on interest rates
- With Beijing economic policy favouring rate cuts and the Fed a series of rises, and Hong Kong’s currency being pegged to the US dollar, city faces a difficult balancing act
The gap where Hong Kong finds itself between Chinese and American economic policy has become a little wider with mainland bank cuts to the benchmark loan and mortgage interest rates. They shaved the one-year loan prime rate from 3.7 per cent to 3.65 per cent and the five-year reference rate for mortgages by a bit more, from 4.45 per cent to 4.3 per cent.
At the same time, the word coming out from the annual Jackson Hole, Wyoming, symposium of central bankers, academics and economists does not hold out much early hope of the US Federal Reserve moderating the current cycle of rate rises to tame inflation, despite signs of weakening in parts of the US economy.
The mainland rate cuts are aimed at shoring up business and consumer confidence to a Covid-battered economy, particularly in the property sector, without triggering a capital outflow in search of higher returns that would do nothing to stimulate recovery.
Thanks to its linked currency exchange rate with the US dollar, Hong Kong has no choice but to follow Federal Reserve policy. As a result, it faces more rate rises, which have begun to feed through to home loans.
For the foreseeable future, we will be living in a relatively high interest rate environment. It cannot be repeated too often that homebuyers and owners need to err on the side of caution about their ability to meet fluid commitments.
Businesses, likewise, need to think ahead to contain risk.
Banks and financial institutions need to be proactive and flexible in helping businesses finance their activities. In that respect, the city’s biggest bank, HSBC, having become the first leading bank to pass on rate rises to customers, has also launched a HK$40 billion financing scheme to provide interest rate rebates and cash incentives to small firms.
Businesses granted a loan through the scheme would get up to HK$20,000 in cash, according to the bank.
So long as the United States and China deal with opposite economic pressures, Hong Kong is likely to face a scenario divorced from local economic reality. The US dollar is strengthening, forcing the Hong Kong Monetary Authority to enter the currency market to defend the local currency.
China’s economy remains weaker than expected and has begun to raise political issues ahead of a key party congress later this year, including concerns about smaller banks, a reeling property sector and pressures on local governments. Sluggish domestic consumption and industrial output reflect a lack of confidence.
The dollar peg is a harsh discipline that ultimately works to Hong Kong’s advantage. But the monetary authority and financial institutions face challenges in striking a balance in the months ahead.