In this Dec 20, 2012 photo, a woman walks beneath signage for the Hong Kong Monetary Authority (HKMA). The HKMA said on July 31, 2017 that total assets of the city’s exchange fund reached about US$499.9 billion at the end of June, HK$97.5 billion more than the total at the end of May. (DALE DE LA REY / AFP)
Stock punters and prospective homebuyers beware — the day of reckoning is near. Years of abnormally low borrowing costs and the plentiful supply of easy credit, which combined to fuel a prolonged stock rally and push property prices to dizzying heights, have lulled many Hong Kong people into believing that interest rates cannot go up and asset prices cannot come down.
Their excessive euphoria was further augmented by the banks which have kept local credit costs unchanged despite six interest-rate increases in the United States since the beginning of last year. Banks were able to do that because of the consistent large inflow of overseas capital, or hot money, which kept filling the liquidity pool.
Repeated warnings by the government and economists that it was unrealistic to expect interest rates to remain unchanged indefinitely have largely fallen on deaf ears.
Now, the market has sent a signal that is harder to ignore. The effect of the widening interest-rate gap between the US and Hong Kong has finally made itself felt in the foreign-exchange market.
Indications that the US Federal Reserve is inclined to take a more aggressive stance in raising interest rates have triggered an outflow of capital from Hong Kong to the US to minimize foreign-exchange risks. The recently published minute of the Fed’s meeting last month showed some members of the policy committee have argued for raising interest rates more quickly in coming months because of strong economic growth, a robust job market and rising inflation, which last month exceeded the Fed’s target of 2 percent.
The day after the release of the Fed’s minute, the Hong Kong dollar exchange rate against the US unit sank below the floor level that required government intervention. Late last week, the Hong Kong Monetary Authority was known to have bought about HK$4 billion to prop up the local currency.
While emphasizing that it has ample resources to defend the pegged exchange rate of the Hong Kong dollar, the HKMA for the first time confirmed the outflow of overseas capital.
Hong Kong does not keep close tabs on capital flow. But the amount going out in the past several weeks was obviously large enough to depress the value of the local currency against the US dollar to which it is pegged under the linked exchange rate system.
The scale of the HKMA’s intervention has remained small but it has drained sufficient liquidity from the system to have an effect on interest rates. The benchmark one-month Hong Kong Interbank Offered Rate, which represents banks’ cost of funds, had surged to 0.85 percent on Friday from below 0.5 percent late last year.
Hong Kong banks are still keeping lending rates unchanged. But they may not be able to do that for much longer if the capital outflow continues for several more weeks. What’s more, the Fed is widely expected to raise interest rates at its June meeting, if not earlier.
Banks are reluctant to raise lending rates because they are worried that doing so could risk bursting the property bubble. The fallout from such a scenario would have a wide-ranging impact not only on the banking system but the entire economy.
Some economists argued that such a concern has made it all the more important for the government to engineer steady but mild increases in lending rates, letting asset markets adjust to the inevitable rise in borrowing costs in a progressive and orderly manner.
In fact, the HKMA has raised its base rate on more than one occasion in the past, which could theoretically affect individual banks’ landing rates. But such direct government intervention has always been wisely kept to a minimum.
In the past several days, many property agents were quoted in the mass media trying to sooth prospective buyers’ concerns by insisting that interest-rate increases would be mild and home prices would continue to rise.
But for those homebuyers who spend as much as 80 percent of their household incomes on mortgage repayments, the latest spurt in the interbank rate, on which most mortgages are based, is anything but inconsequential.
The author is a current affairs commentator.