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US charge hikes pressure Hong Kong’s virus-weakened financial system

Issued on: 15/05/2022 – 05:02Modified: 15/05/2022 – 05:00 Hong Kong (AFP) – Current charge hikes from the Federal Reserve have…

By Staff , in Economy , at May 15, 2022

Issued on: Modified:

Hong Kong (AFP) – Current charge hikes from the Federal Reserve have come at a nasty time for Hong Kong which, because of its US greenback peg, should observe go well with regardless of its personal flagging financial system.

Hong Kong has pegged its forex to the US greenback since 1983, which has helped town climate financial storms such because the 1997 Asian monetary disaster and underpinned its standing as a serious international finance hub.

But it surely additionally means Hong Kong has little alternative however to observe the Fed’s newest spherical of hawkish charge hikes -– the most important of its type in 22 years.

“The Covid outbreak in Hong Kong and in mainland China is already hurting progress,” senior economist at Oxford Economics Lloyd Chan informed AFP.

“The very last thing that Hong Kong wants now could be a rising rate of interest.”

The town on Friday revised its 2022 GDP progress forecast all the way down to between one and two %, after a worse-than-expected 4 % drop within the first quarter.

Low interest rates that Hong Kong has enjoyed for more than a decade are now facing a reversal, the city's finance secretary has said
Low rates of interest that Hong Kong has loved for greater than a decade at the moment are dealing with a reversal, town’s finance secretary has stated ISAAC LAWRENCE AFP

Monetary Secretary Paul Chan wrote final week that Hong Kong was now dealing with a reversal of the low rate of interest setting it had loved for greater than a decade.

“Because the financial system has not but totally recovered from the epidemic, we have now to concentrate to the impression of rate of interest hike… (on) folks and small and medium enterprises,” he wrote on his official web site.

Affect on housing market

Hong Kong banks have to date saved their finest lending charges regular, however they’ll really feel the squeeze in three to 6 months, analysts say.

Hong Kong's housing market is likely to feel the heat from interest rate hikes, analysts say
Hong Kong’s housing market is more likely to really feel the warmth from rate of interest hikes, analysts say ISAAC LAWRENCE AFP

“The rate of interest could improve faster than previously, given the quicker tempo from the Fed and in addition the change within the general background danger sentiment on this planet,” economist Gary Ng of Natixis informed AFP.

Homebuyers whose mortgages are linked to the Hong Kong interbank provided charge (HIBOR) would be the first to really feel the warmth, stated economist Heron Lim at Moody’s Analytics.

“This often has a downward impact on housing costs, (which) ought to shrink in 2022 and into 2023 as nicely, particularly if there’s low demand from mainland Chinese language buyers,” Lim informed AFP.

The Hong Kong authorities on Friday stated it anticipated indicators of revival later this 12 months following the relief of coronavirus curbs that floor the financial system to a halt within the first quarter.

However the charge hikes might dampen a home rebound as the upper burden shouldered by homebuyers will eat into their consumption energy.

Small and medium-sized companies additionally doubtlessly face a “actually powerful time” if the rising charges coincide with a Covid resurgence, economist Samuel Tse of DBS Financial institution informed AFP.

Hong Kong continues to be hewing to a lighter model of China’s zero-Covid mannequin that has taken a toll on companies within the metropolis.

Greenback peg ‘defensible’

Hong Kong permits its forex to commerce inside a variety of seven.75-7.85 to the buck.

Capital outflows and intense promoting of the Hong Kong greenback in latest months have pushed it to the weak finish of that buying and selling band.

Final week, the Hong Kong Financial Authority (HKMA)spent HK$8.53 billion ($1.08 billion) in three makes an attempt to prop up the native forex, the primary intervention since 2019.

The Hong Kong dollar has been pegged to the US greenback since 1983
The Hong Kong greenback has been pegged to the US buck since 1983 ISAAC LAWRENCE AFP

Some commentators have begun questioning the sustainability of the peg, citing pressures of the pandemic and geopolitical tensions between China and america.

Responding to a Bloomberg op-ed, HKMA deputy chief govt Edmond Lau stated earlier this month that the US greenback peg was a “extremely sturdy and clear system” and “extremely resilient”.

“Hong Kong’s financial base is totally backed by US greenback belongings,” Lau wrote, including that the federal government had ample fiscal reserves and no web debt.

All 4 analysts who spoke with AFP agreed that Hong Kong would maintain on to the peg regardless of adjustments within the international financial system.

“Though the overseas reserve has dropped from $500 billion to round $460 billion, it’s nonetheless a comparatively excessive degree which must be sufficient to defend the Hong Kong greenback,” stated Tse of DBS.

Lim at Moody’s stated the HKMA battle chest ensured the peg was “very defensible”, including that the association had coverage worth as Hong Kong remained a world gateway to China’s financial system.

Ng of Nataxis famous that there has not been any selloff or panic offloading of Hong Kong dollar-related belongings, which he stated bodes nicely for the way forward for the peg.

“However within the medium or long term,” he added, “it relies on whether or not this forex stability nonetheless has advantages that outweigh the prices, such because the divergence… between China and the US.”

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