Keep your eyes glued to cap­i­tal flow rather than in­ter­est rates

China Daily (Canada) - - HONG KONG -

It seems Hong Kong is the only ma­jor stock mar­ket in the world that still cares about when the US Fed­eral Re­serve (Fed) will next raise in­ter­est rates.

We would have thought the mar­ket had al­ready ad­justed it­self to the like­li­hood that, after so many false starts in the past, the Fed will make the move be­fore the end of the year, most prob­a­bly in De­cem­ber. But, ap­par­ently, that’s not the case.

Last Tues­day’s plunge in the bench­mark in­di­ca­tor when trad­ing re­sumed after a long week­end was widely at­trib­uted to talk of an im­mi­nent rate hike, fanned by a ro­bust in­crease in new jobs. Un­sur­pris­ingly, the in­ter­est-rate sen­si­tive prop­erty stocks took a heavy beat­ing, drag­ging down the in­dex in the fol­low­ing days.

On the­ory, a rise in the cost of funds would dis­cour­age in­vestors and po­ten­tial homes buy­ers from bor­row­ing money from banks to buy prop­er­ties. But, in re­al­ity, this is not al­ways the case.

In Hong Kong, the pri­mary con­cern of in­vestors, or the av­er­age homes buyer, is the price trend. Po­ten­tial buy­ers are con­vinced that the mar­ket up­swing, which be­gan in May, is con­tin­u­ing to gather mo­men­tum.

As a re­sult, more and more peo­ple want to buy what­ever prop­er­ties they can af­ford be­fore prices go up fur­ther. The buy­ing spree, which is push­ing up prices, is fur­ther fu­eled by banks cut­ting their profit mar­gins on mort­gage fi­nanc­ing to grab mar­ket share when loan de­mand from other eco­nomic sec­tors has re­mained de­pressed.

It’s widely ex­pected that the Fed will take a cau­tious ap­proach in rais­ing in­ter­est rates to avoid short-cir­cuit­ing the eco­nomic re­cov­ery. Econ­o­mists es­ti­mate that a 25-ba­sis­point surge in US in­ter­est rates would not ne­ces­si­tate a cor­re­spond­ing hike in Hong Kong to de­fend the linked ex­change rate sys­tem.

The pro­jected in­crease in the in­flow of cap­i­tal from re­gional economies to hedge against the de­pre­ci­a­tion of their re­spec­tive cur­ren­cies against the US dol­lar after an in­ter­est-rate hike would be suf­fi­cient to keep the Hong Kong dol­lar at the pegged ex­change rate.

So, in­stead of wor­ry­ing about when the Fed will lift rates, Hong Kong in­vestors should keep their eyes glued to the flow of cap­i­tal which is hav­ing a di­rect im­pact on as­set prices.

PRO­VIDED TO CHINA DAILY

The up­ward mo­men­tum of Hong Kong prop­erty prices is un­likely to be curbed due to home buy­ers’ ur­gent de­mand and much­heated bor­row­ing mar­ket greased by banks cut­ting fi­nanc­ing costs even though the US Fed­eral Re­serve may in­crease its in­ter­est rate by year-end.

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