Hot money in­flow can cush­ion rate-hike woes

China Daily (Hong Kong) - - BUSINESS HK - PETER LIANG

Weeks be­fore the US Fed­eral Re­serve was to de­cide on whether or not to raise in­ter­est rates, the stock mar­ket had set the di­rec­tion based on in­fla­tion and other eco­nomic ex­pec­ta­tions.

Fol­low­ing the surge in US bond yields, Hong Kong ’s bench­mark one-month in­ter­bank rate had risen to more than 0.6 per­cent on Wed­nes­day — the high­est level in eight years, from around 0.2 per­cent ear­lier this year. It seems ob­vi­ous that the mar­ket has taken the view that the pro­jected in­crease in in­fla­tion will drive up in­ter­est rates at a much faster pace than ear­lier ex­pected.

Sur­pris­ingly, ex­pec­ta­tions of higher bor­row­ing costs have pumped up as­set prices in Hong Kong rather than de­press­ing them as com­mon wis­dom would sug­gest. The lo­cal stock mar­ket was ba­si­cally track­ing the rally in the US, backed by strong buy­ing sup­port, es­pe­cially in the fi­nan­cial and com­mer­cial sec­tors. Even the mar­ket’s sup­pos­edly rate sen­si­tive prop­erty sec­tor has made steady gains in re­cent weeks.

The govern­ment’s mea­sures to cool the proper ty mar­ket have dis­cour­aged some in­vestors, re­sult­ing in de­clin­ing trans­ac­tions. But, homes prices have con­tin­ued to surge be­cause many first-time buyers who are not af­fected by the lat­est cool­ing mea­sure are mak­ing a dash to take ad­van­tage of the low in­ter­est mort­gage loans be­fore higher rates set in.

Some prop­erty ex­perts and in­vest­ment an­a­lysts have pre­dicted that faster-than-ex­pected rate hikes next year will push prop­erty prices down by an es­ti­mated 10 to 15 per­cent in the first half of 2017. Others dis­agree. They ex­pect strong hous­ing de­mand to con­tinue pro­pel­ling prop­erty prices, while real in­ter­est rates will re­main low be­cause of ris­ing in­fla­tion.

DTZ — a ma­jor prop­erty agent — has said it ex­pects av­er­age homes prices in Hong Kong to go up by 5 per­cent to 10 per­cent in the first half of next year.

In mak­ing in­vest­ment de­ci­sions in these in­trigu­ing times, in­vestors have to take into ac­count the in­flow of cap­i­tal from neigh­bor­ing economies that is hav­ing a ma­jor im­pact on as­set val­ues and in­ter­est rates. There’s lit­tle rea­son to be­lieve that the in­flow of cap­i­tal, or hot money, will stop, or re­verse, any­time soon be­cause of the strong de­mand for Hong Kong dol­lar-de­nom­i­nated as­sets by re­gional in­vestors to hedge against the de­pre­ci­a­tion of their re­spec­tive cur­ren­cies against the US dol­lar.

There’s lit­tle rea­son to be­lieve that the in­flow of cap­i­tal, or hot money, will stop, or re­verse, any­time soon be­cause of the strong de­mand for Hong Kong dol­lar­de­nom­i­nated as­sets by re­gional in­vestors to hedge against the de­pre­ci­a­tion of their re­spec­tive cur­ren­cies against the US dol­lar.”

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