CITY’S INTEREST RATE RISES BY THE MOST IN 22 YEARS

Hong Kong’s biggest banks hold their lending costs unchanged for now as finance minister warns public of higher mortgage repayments

Hong Kong’s cost of money soared by the most in 22 years as the city’s de facto central bank followed the US Federal Reserve to usher in an era of faster, bigger rate increases, even while the local economy is reeling from a slump.

The city’s base lending rate rose by 50 basis points to 1.25 per cent, after the Fed raised its rate by half a percentage point, according to a statement by the Hong Kong Monetary Authority (HKMA). That marked the biggest one-time increase in Fed rates since 2000.

“The interest rate adjustment will come at a much faster pace than the last cycle,” HKMA’s chief executive Eddie Yue Wai-man said in a media briefing after announcing the monetary policy, warning borrowers to “carefully assess and manage the relevant risks” in borrowing.

The Fed has signalled 10 increments in US interest rates, raising the Fed rate from zero to 2.6 per cent by the end of this year, and to 3.75 per cent by the end of 2023, economists said. That is a faster pace than the previous cycle, when the Fed rate rose 2.25 percentage points in the four years from 2015 to 2018.

“This is just the beginning of the [rising] interest rate cycle,” said Raymond Yeung, chief economist for the Greater China region at ANZ, the Australian bank. “Many mortgage and loan borrowers have never seen such high rates.”

Hong Kong’s biggest banks are holding their prime rates unchanged for now, with HSBC, Bank of China (Hong Kong) and Hang Seng Bank keeping it at 5 per cent, while Standard Chartered and Bank of East Asia held their rate steady at 5.25 per cent, according to their statements after the HKMA’s move.

“For members of the public, the rise in interbank rates will increase their mortgage repayment expenses,” said Financial Secretary Paul Chan Mo-po, in response to media questions. He also noted that with the economy not yet fully recovered and with a relatively high unemployment rate, the higher interest rates could add more financial pressure for some property owners.

In the previous cycle, the city’s banks waited through nine consecutive increments of 25 basis points each by the HKMA before raising their prime rate by 0.125 percentage point in 2018, passing some of the higher borrowing costs to customers for the first time in a decade.

The rising base rate spills over to the interbank offer rate (Hibor), with the 12-month Hibor jumping by 17 basis points to 2.33 per cent yesterday morning on the heels of the HKMA’s move, compared with 0.43 per cent in January.

Most Hong Kong mortgage loans are tied to the Hibor, translating to higher monthly payments for borrowers.

A HK$5 million loan for 30 years would have to pay HK$976 more every month if the one-month Hibor rose to 0.6 per cent from the current 0.2 per cent, said mReferral Corporation’s chief vice-president Eric Tso Tak-ming.

On the higher end of the scale, one-month Hibor at 0.8 per cent translated to HK$1,984 in additional monthly payments on the same loan, while a 1.2 per cent rate meant HK2,500 in increased payments, he said.

Hong Kong’s monetary policy has been run in lockstep with the Fed ever since the local currency was pegged to the US dollar in 1983. The city’s base rate would rise to about 4 per cent by the end of 2023, according to the 10-step policy that would take the Fed rate to a 15-year high of 3.75 per cent to tamp down on rising inflation in the US economy, ANZ said.

“If the [base] rate goes up to 4 per cent or more, property sales will slow down, especially since the economy is weak,” Tso said.

Rising cost of capital comes at a bad time for Hong Kong, as the local economy has been ravaged by a resurgent Covid-19 pandemic that is only beginning to ebb. Months of social distancing and closed businesses have caused the city’s economy to shrink by 4 per cent in the first quarter, worse than the 1.3 per cent contraction expected by economists.

“Hong Kong’s economy is just beginning to recover from the pandemic, so any quick upwards move in interest rate is not favourable,” said Tommy Ong, DBS Bank’s managing director of Greater China wealth management solutions, treasury and markets.

The US economy has not seen a 50-basis point rate jump since 2000 when Alan Greenspan was Fed chairman, and his “irrational exuberance” became the catchphrase that defined the easy money of the dotcom era.

The Fed raised its key rate from a target range between 0.25 and 0.5 per cent, to between 0.75 per cent and 1 per cent.

Global stock markets reacted with relief after the increases were announced, as the Fed veered away from its more hawkish stance, saying that a larger 75-basis point increase was not “being actively considered”.

Hong Kong’s benchmark Hang Seng Index fell 0.4 per cent after rising by as much as 2 per cent in early trading, taking its cue from a 3 per cent surge overnight in the S&P500 index after the Fed pulled its punches.

The stock market had factored in rising interest rates and was unlikely to make major swings, as the Fed’s move had been foreshadowed and analysed exhaustively, said Louis Tse Ming-kwong, managing director of Wealthy Securities.

“How mainland China copes with the rising Covid-19 outbreaks [in Shanghai and Beijing] would have a bigger impact on the Hong Kong stock market than the expected interest rate rises,” Tse said.

Hong Kong’s finance officials have repeatedly warned the city’s borrowers about the risks of higher interest rates, with the HKMA’s Yue saying on Tuesday that the Hong Kong dollar was weakening as capital flows out of the city to chase after highyielding US rates.

One of the external headwinds that China’s economic policymakers have been warning about has materialised, with the US Federal Reserve announcing its sharpest interest-rate increase in more than two decades.

The US Federal Reserve’s move on Wednesday – raising the benchmark interest rate by 50 basis points to a target rate range of between 0.75 and 1 per cent – was expected, and it will be followed by further tightening later this year.

But analysts warn that the central bank’s aggressive attempt to tame the highest inflation in 40 years will lure a large amount of capital back to the United States, exert depreciation pressure on the yuan, and curtail Beijing’s monetary policy loosening – a key tool to help coronavirus-hit businesses and achieve the government’s annual economic growth target.

Unlike the Hong Kong Monetary Authority, which subsequently announced a 50-basis-point rise, the People’s Bank of China (PBOC) kept the rate unchanged when selling 10 billion yuan (HK$11.8 billion) worth of reverse repo – a regular liquidity-injection tool – yesterday, and lifted the daily yuan-US dollar midpoint 0.8 per cent higher.

Tan Yaling, head of the Beijingbased China Forex Investment Research Institute, said that an acceleration in capital outflows – the result of US Treasury bond yields surpassing those of Chinese bonds – could be partly offset if Beijing strengthened its regulation of the forex market and stepped in to prevent excessive depreciation of China’s currency.

“The yuan is not a fully convertible currency,” she said. “Forex controls should be put in place when necessary. They are all for the sake of [financial] security.”

Overseas investors had already slashed their holdings of Chinese bonds and equities by 112.5 billion yuan in March, after selling 80.3 billion yuan worth a month earlier.

And after a net inflow of 1.9 billion yuan via the mainlandHong Kong Stock Connect programme was reported in April, an additional 275 million yuan inflow was seen yesterday, the first trading day of May following the public holiday, according to data from Eastmoney.com.

UBS chief China economist Wang Tao forecast on Wednesday that the yuan’s exchange rate could reach 7.0 against the US dollar at some point, but may settle at around 6.9 by year’s end, amid the US monetary policy tightening. A higher yuan exchange rate figure means it takes more yuan to purchase one US dollar, indicating a weaker Chinese currency.

Wang also pointed out that China’s central bank was looking to slow the depreciation momentum.“It has other means to control depreciation, including cutting the reserve requirements further, reintroducing the countercyclical factor in its daily fixing, and tightening controls on capital outflows,” she wrote in a research note.

Ding Shuang, chief Greater China economist at Standard Chartered Bank, also noted that Beijing had many tools to manage outflows and defend the yuan, but interest rate increases in the US would weigh heavily on Beijing’s ability to cut the reserve requirement ratio (RRR) and policy rates.

“We are expecting, at most, one cut of the medium-term lending facility for this or next month, but the window is closing under the monetary policy divergence,” he said.

Ding said the PBOC tended to primarily use quantitative tools and some “concealed” rate cuts to help accomplish the country’s growth targets.

For instance, the central bank set the relending rate on the quota for logistics, coal and technological innovation at 1.75 per cent, lower than the 2 per cent rate for existing quotas for small business and the agriculture sector.

Meanwhile, it has pushed state-owned banks to lower the deposit-rate ceiling – a move that will create more room for funding rate cuts.

“The policymakers tend to avoid headline rate cuts, in case capital outflows accelerate,” Ding said. “Beijing should beef up policy support, but it should also consider fine-tuning its pandemic-control measures. Fiscal and monetary stimulus won’t work well if economic activities can’t be started as normal.”

The world’s second-largest economy remains determined to achieve seemingly conflicting goals of maintaining a “dynamic zero-Covid” strategy while achieving an economic growth rate of “around 5.5 per cent” for this year.

The US rate increases make China’s gross domestic product growth goal even more difficult.

External shocks are being amplified as market concerns over weakened economic fundamentals, including the plunge in retail sales amid rigid lockdowns in some large cities, supply-chain disruptions, and price inflation amid the RussiaUkraine war.

And as the promised support from the Politburo, China’s cabinet, has yet to unfold, domestic economic figures continue to deteriorate, triggering louder calls to prioritise domestic growth and adjust the rigid implementation of zero-Covid efforts.