US rate hike increases pressure on Hong Kong economy

The US Federal Reserve’s rate hike came at a bad time for Hong Kong, which has to do the same due to its currency gap despite its weakening economy.
Hong Kong’s local currency has been pegged to the dollar since 1983, something that has helped the city resist economic problems such as the 1997 financial crisis in Asia and given it a privileged status as a global financial center.
But it also means Hong Kong has little choice but to follow the Federal Reserve’s latest decision to raise interest rates, the largest in 22 years.
“The outbreak of Covid in Hong Kong and the Chinese mainland is already hurting growth,” Lloyd Chan, a senior economist at Oxford Economics, told AFP. “The last thing Hong Kong needs now is an interest rate hike.”
The city on Friday revised its forecast for GDP growth for 2022 and announced a decline from previous expectations by between 1 and 2 percent, after a worse-than-expected decline of 4 percent in the first quarter.
Finance Minister Paul Chan wrote last week that Hong Kong is now facing a rollback from the low interest rate environment it has enjoyed for more than a decade.
“At a time when the economy has not yet fully recovered from the epidemic, we need to pay attention to the impact of raising interest rates … on people and on small and medium-sized enterprises,” he said in his official statement. website written.
– Implications for the housing market – Hong Kong banks have maintained their best lending rates so far, but will feel the pressure within three to six months, analysts say.
“The interest rate could rise faster than in the past, given the faster pace by the Federal Reserve and the change in risk sentiment in the world in general,” Natixis economist Gary Ng told AFP.
Moody Analytics economist Heron Lim said homeowners whose mortgages were linked to the HIBOR interbank rate would be the first to feel the effects.
“This usually leads to lower house prices, which are expected to shrink in 2022 and through 2023 as well, especially if demand from Chinese mainland investors is low,” Lim said.
And the Hong Kong government announced on Friday that it expects signs of recovery later this year after easing Covid constraints that hit the economy hard in the first quarter.
However, the increase in the rate will overshadow the recovery locally, as the additional burden on homeowners will reduce their purchasing power.
Small and medium-sized businesses will also face a “very difficult period” if the rate hike coincides with the revival of the Covid outbreak, said Samuel Tse, an economist at DBS Bank.
Hong Kong remains committed to a less stringent version of China’s “zero COVID-19” model, which has negatively impacted business in the city.
The dollar is ‘defensible’ – Hong Kong allows its currency to trade between 7.75-7.85 against the dollar.
Capital deviations and massive sales of the Hong Kong dollar in recent months have led to its decline.
The Hong Kong Monetary Authority last week spent HK $ 8.53 billion ($ 1.08 billion) in three efforts to strengthen the local currency, its first intervention since 2019.
Some commentators have begun to question the extent to which this link can be maintained, pointing to the tension of the pandemic and geopolitical tensions between China and the United States.
In response to an article in Bloomberg, Edmund Lau, executive vice president of Hong Kong Monetary Authority, said earlier this month that the local currency pegged to the dollar was a “very strong and transparent system” and “highly resilient”.
“Hong Kong’s monetary base is fully supported by US dollar assets,” he wrote, adding that the government has large financial reserves without net debt.
The four analysts who spoke to AFP agreed that Hong Kong will stick to the correlation between the two currencies despite changes in the world economy.
“Although foreign reserves have fallen from $ 500 billion to about $ 460 billion, they are still at a relatively high level that should be enough to defend the Hong Kong dollar,” DBS’s Tse said.
Moody’s Lim said the Hong Kong Monetary Authority’s war fund ensures the link is “highly defensible”, adding that it holds value in terms of city policy, as Hong Kong is an international gateway to China’s economy.
Ng of Nataxis pointed out that Hong Kong’s dollar-linked assets saw no sales or attempts to abandon it due to panic, which is a positive indicator for the future of the correlation between the two currencies.
“But in the short or long term … it depends on whether this currency stability still has advantages over costs, such as the difference … between China and the United States,” he said.

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