Hong Kong Economy in Deep Water as Interest Rates Rise in Tandem With China and US Markets

Analysts believe that the economic correlation between Hong Kong and China makes it difficult to keep up with the European and American markets. Following the US interest rate hike will sacrifice some of Hong Kong's economic growth, primarily in the property market. However, the linked exchange system gives HKD the monetary stability that emerging markets in the world want. To a certain extent, it stops the market from crashing. (Sung Pi-Lung /The Epoch Times)

The economy has been tense all over the world due to fuel and gas price increases, the ongoing war between Russia and Ukraine, and rampant inflation. In response to the high domestic inflation, the U.S. Federal Reserve increased the interest rate five times this year. Since Hong Kong’s system depends on the linked exchange rate to the U.S. dollar, Hong Kong had to follow suit.

However, the situation in Hong Kong differs from that in America. The interest rates have to climb even though the composite consumer price index has increased by only 1.9 percent.

Analysts believe that the economic relevance between Hong Kong and mainland China will rise, but it won’t be easy to synchronize with the steps of America and Europe.

Following the rate hike, Hong Kong will sacrifice part of its economic growth, particularly in the property market.

On the other hand, the linked exchange rate system will give monetary stability to the Hong Kong dollar that the rest of the world craves.

The U.S. Federal Reserve raised the interest rate by 0.75 percent at the end of September. The rise makes a total of five rate hikes in 2022, for a total increase of three percent—a first in the past 30 years.

The Hong Kong Monetary Authority immediately increased the prime rate by 75 basis points to 3.5 percent. Additionally, the increase in deposit interest continues to rise, and so puts pressure on mortgages.

Considering everything will only continue to rise, the weakness of the recent property market in Hong Kong, population decline, and the intensity of the Russia-Ukraine war, mean the economic prospects do not look good.

The United States continues its rate hike strategies to tackle inflation; and the Consumer Price Index (CPI) in the U.S. in August rose yearly by 8.3 percent, which is higher than what the market expected.

Hong Kong’s composite CPI has a mini scope increase of 1.9 percent but the authorities had no choice but to passively follow the rate increase.

While Hong Kong Finance Analyst Cheung Ting-ming explained that the increase in Hong Kong’s interest rates is detrimental to the economy, he could not determine whether it was the linked exchange rate that was the problem.

Cheung, however, said if Hong Kong lowered the rates instead, it would create a massive capital outflow, “Hong Kong does not have capital reserves like in mainland China. If a large number of funds move away, it will seriously cripple Hong Kong.”

Expert: Hong Kong Is Going to Sacrifice Part of its Economic Growth

Columnist David Wong pointed out that the small rise in the Hong Kong Consumer Price Index (CPI), was one less problem to worry about. The cause of Hong Kong’s interest rate hike depends on the margin difference between the HK and U.S. dollars.

Wong described the current situation as peculiar, “Since the inflation gap between the United States and Hong Kong is widening, the last time the CPI rose so drastically in the European or American market was traced back to the Middle East Oil Crisis.”

Hong Kong followed the rate hike at the expense of some economic growth. “Strengthening the U.S. and Hong Kong currencies has its pros and cons. The pro is that there are no concerns of possible inflation that can be brought about by importing. But the foreign investment will be hefty coming to Hong Kong. It would be better for investors to put their money elsewhere, such as Japan, the UK, or other southeast Asian markets,” Wong said.

“From another perspective, the property market price has skyrocketed for many years and is [now] out of this world,” Wong explained.

The average workers can’t possibly keep up with the property prices with their income.

According to the annual report from Demographia, an international public policy consultantancy firm, Hong Kong property prices have long been among the most expensive in the world.

“You can say it is overheating, or a rate hike could stop the Hong Kong property prices from soaring.”

Wong also expressed that the global economy is going down quickly. Hence interest rate hikes ultimately would not be helpful to the investment environment. “But the inflation is already in our face, so that is not an alternative.”

Hong Kong did not follow the rate hike, due to its ample funds, until banks such as HSBC were interested in raising the prime rate.

Wong said that the current mortgage rate is not too high because the increase is still limited. However, some property owners abroad are already screaming for help.

Mind the Risks

Hong Kong Monetary Authority President Yu Wai-man stated on Sept. 22, “Besides the U.S. Federal Reserve, multiple major central banks have followed the policy to tighten monetary policy. Adding geopolitical issues, pandemic development, and unclear factors of high inflation and low growth, the risk of the international stock market is also rising.” Yu warned that the global macro environment is becoming more complex.

He said, “The public must prepare for a future increase of the Hong Kong dollar interest rate, noting that many banks have already adjusted the locked-in ceiling of the new mortgage loans. It will likely increase deposit rates, including  prime, and has increased the rate drastically. Hence, people should evaluate the risks when deciding on a property, mortgage, or other loans.”

Cheung Tin-ming observed that Hong Kong’s economy and market are increasingly influenced by the mainland, and “it is indeed more and more synchronized with the mainland.”

For instance, in the capital market, most enterprises listed on the Hong Kong stock market are mainland corporations.

In 2021, the number of new shares from the mainland took 87 percent of the market, a rise from 75 percent in 2020.

Trade Markets Linked to China

As for trade, Hong Kong’s main foreign trading partner is mainland China. In terms of total trade value, the mainland accounted for 52.4 percent of Hong Kong’s total trade in 2021.

Cheung stated the economic and demand situations in the mainland would decisively impact Hong Kong’s foreign trade.

Wong said that “The mainland and Hong Kong economic correlation has improved in the past decade, such as, travel, share listings, sources of funds for buying properties, and the relationships with Macau and Shenzhen. However, the advantage of exchange linkage is to bring monetary stability to the Hong Kong dollar which the emerging markets in the world are hungry for.”

He also added that many markets sank because they could not hold on to their currencies, such as, Indonesia, Vietnam, and South America.

When asked if Hong Kong was synchronized with China instead of America, would the above dilemma have been brought to the Hong Kong economy? Is it innate that the Hong Kong economy can’t integrate with China?

Wong said that if Hong Kong can continue the role of an international financial hub, then its economic structure will develop differently from the mainland’s economy.

“Just as Shanghai is different from every other mainland city in China. The GDP cycle is completely different, even with its neighboring Zhejiang and Jiangsu provinces. Or you can say Hong Kong is more similar to London—a city that lives off the finance markets.”

Wong said, “Since the outbreak of the pandemic, Hong Kong has actually relied on the financial industry to overcome the storms. Tourism, high-end brands, gold shops, and property markets have been in deep water.”