Hong Kong enters economic winter as US raises interest rates again

HSBC, one of the banks issuing banknotes in Hong Kong, increased the prime rate of the Hong Kong dollar (HKD) by 0.125% on September 23rd. A rate hike means Hong Kong has officially entered a rate hike cycle.

The Hong Kong Monetary Authority (HKMA) was expected to come up with a rescue package as rising interest rates weakened Hong Kong’s property market. The Federal Reserve Board said the rate hike countered inflation and further depreciated the value of the renminbi (RMB). Financial analysts say the Hong Kong dollar’s current pegging exchange rate will force the already fragile Hong Kong economy to keep up with the pace of U.S. interest rate hikes. The market is even worse.

In March, the Fed reiterated after its meeting that it was appropriate to keep raising interest rates to control inflation. He also expects interest rates to rise to 4.6% in 2023 and not fall until 2024.

Hong Kong officially enters economic winter

After the Federal Reserve raised interest rates significantly several times, Hong Kong banks finally followed suit and raised their prime rates.

HSBC announced on September 23 that it had raised the Hong Kong dollar’s prime rate by 0.125% for the first time in nearly four years.

Analyst: HK dollar interest rate hike is terrible for economy

Hong Kong financial analyst Cheung Tin-ming said Hong Kong’s current economy is very fragile. Due to enormous fiscal pressure, GDP contracted by 1.3% in the second quarter of 2022 compared to the same period in 2021. The first quarter of 2022 also saw him down 3.9% compared to the first quarter of 2021.

She thought Hong Kong’s economy could contract again this year, for the third time since 2019.

“Under these circumstances, if Hong Kong follows the United States in raising interest rates, it will further exacerbate the already declining economy of Hong Kong.”

Mr Cheung explained that a rate hike would increase the cost of capital, reduce investment returns and investment appetite, and lower economic activity. “When this happens, it equates to curtailing or delaying business projects and production, resulting in the loss of foreseeable future employment opportunities. It has a negative impact on economic development.”

Financial analysts also stressed that rate hikes would force mortgages to rise, reducing market demand. It should.” She continued that a property owner’s monthly loan repayments should also be significantly higher in the early years of ownership. “Rising mortgage rates will reduce disposable funds, but the bigger impact will be downside risk to real estate prices.”

real estate market flop

The HKMA has taken action and announced that it will lower its stress test requirements on September 23rd.

Guidelines have been released for local banks to reduce the stress test requirement from 3% to 2%. This adjustment applies to all mortgages and is effective immediately.

The purpose of stress testing is to ensure that the borrower has the ability to repay. Avoid banks that suffer from bad debt. The move is to properly manage the risks in the mortgage business.

Decrease in stamp duty income due to lower purchases

In addition to the plunging property market, government tax revenues have also shrunk significantly. Finance Secretary Paul Chan Mo-po wrote on Sept. 18 that in his first four months of 2022, residential real estate transactions were down 37% of his. A slump in the property market combined with a drop in his average daily turnover of Hong Kong stocks has reduced stamp duty income. In 2022, he could be 30% below expectations.

Political move and COVID-19 draconian measures ruin Hong Kong economy

Meanwhile, the Hong Kong government has finally eased COVID-19 quarantine restrictions for international tourists. But it may be too little and too late.

Cheung noted that between mid-2021 and mid-2022, Hong Kong’s population will see a net exodus of 113,200 people. And the departure of Hong Kong people, combined with the aging population of Hong Kong, will lead to lower levels of production and consumption, he said.

Hong Kong is already facing an aging population. The same goes for the decline in production and consumption. ’ Chong warned.

Chan elaborated that easing the pandemic quarantine policy could be a way for the Hong Kong government to ease Hong Kong’s current predicament. I thought it might not bring much improvement to .

“The root cause of the recession is a lack of confidence. “