Steady rate hikes still bet­ter than sud­den jerks for HK

China Daily (Canada) - - HONG KONG -

Hong Kong in­vestors have shrugged off re­peated warn­ings from the gov­ern­ment and econ­o­mists about im­pend­ing rate hikes as noth­ing more than “cry wolf”. They be­lieve that the never-end­ing in­flow of over­seas cap­i­tal into Hong Kong will con­tinue to flush the bank­ing sys­tem with liq­uid­ity, negat­ing any need to bring lo­cal rates in line with those in the United States.

They could be wrong. The Hong Kong Mon­e­tary Author­ity — the city’s de facto cen­tral bank — which had done lit­tle in the past, is be­com­ing ac­tive in try­ing to ab­sorb “ex­ces­sive” liq­uid­ity in the bank­ing sys­tem by sell­ing debt in­stru­ments on a reg­u­lar ba­sis to fi­nan­cial in­sti­tu­tions.

Its lat­est move is seen as hav­ing been trig­gered by con­cerns stem­ming from the widen­ing in­ter­est rate dif­fer­en­tial be­tween Hong Kong and the US. De­spite the huge gap, the de­mand for Hong Kong dol­lars re­sult­ing from cap­i­tal in­flow has made it un­nec­es­sary to raise rates to de­fend the linked ex­change rate mech­a­nism.

The sit­u­a­tion is be­com­ing in­creas­ingly un­ten­able with the US Fed­eral Re­serve hav­ing set in mo­tion the un­wind­ing of its bal­ance sheet, lead­ing to high ex­pec­ta­tions of an­other rate hike by at least 25 ba­sis points in De­cem­ber. Grow­ing ex­pec­ta­tions of cur­rency ap­pre­ci­a­tion, cou­pled with higher in­ter­est re­turns in the US, could be too much of a lure to over­seas in­vestors.

For that rea­son, fur­ther de­lay­ing in­ter­est-rate in­creases in Hong Kong could lead to sud­den and large rate hikes later as a re­sult of a mas­sive out­flow of over­seas cap­i­tal to the US. The mag­ni­tude of the credit tight­en­ing could wreak havoc on the as­sets mar­ket, lead­ing to a pos­si­ble col­lapse in prop­erty prices that have been pushed to the cur­rent high lev­els by the plen­ti­ful sup­ply of liq­uid­ity at record low costs.

With the sys­tem still flushed with liq­uid­ity, there’s lit­tle rea­son for banks to raise rates at this time. The HKMA may have to step up its ef­forts to soak up the ex­cess liq­uid­ity to en­sure a steady and pro­gres­sive in­crease in bor­row­ing cost, rather than sud­den jerks that could throw the cap­i­tal mar­ket out of kil­ter.


Hong Kong banks seem re­luc­tant to raise rates amid high liq­uid­ity lev­els.

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