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Surrounded by stormy weather, Hong Kong heads for sunny days

Global financial markets continued to be volatile last week. Many major central banks raised interest rates sharply and anticipated further rate hikes to come, triggering significant volatility in the stock, foreign exchange and commodity markets. The market is mainly concerned that rapid and substantial interest rate hikes will weaken economic growth momentum and business profits, causing the economic environment to become more fragile. Investors are also worried that the global economy is already on the verge of recession, which could spark a new round of significant financial volatility.

Among the many central banks that raised interest rates, the one that caught the most attention was the 0.75% rate hike by the US Federal Reserve (Fed) last week, raising the target range for the federal funds rate to 3 - 3.25%. It was the fifth interest rate hike by the Fed this year, bringing the total rate hike to 3%, which was at the fastest pace in over 30 years. At the same time, the UK raised interest rate by 0.5% last week, marking its seventh consecutive rate hike. In Sweden, the interest rate was significantly lifted by 1%, exceeding market expectations.

Following widening interest rate differentials between the US dollar and other currencies, the US dollar had strengthened further with the US Dollar Index hitting a 20 year-high to above 113. In contrast, the pound fell significantly to a 37-year low while the Euro and the Japanese Yen also plunged to hit their 20-year and 24-year lows respectively. The Japanese Yen plummeted below 145 per US dollar, propelling Japan’s central bank to intervene in the currency market last week for the first time since 1998.

Apart from interest rate differentials, foreign currency exchange rates are also affected by policy risks. The UK government’s latest tax cuts and energy subsides are seen by the market as being inconsistent with its policy objective of curbing inflation, and that it may further worsen the government’s fiscal position. This triggered a massive sell-off of the Pound.

As inflation has stayed high in the US, Europe and the UK at 8-10%, the market expects interest rates to continue to rise, putting more pressure on global stock markets. The US S&P 500 Index and Hang Seng Index have both fallen by 23% cumulatively since the start of this year.

The World Bank pointed out earlier that central banks around the world have sharply and simultaneously raised interest rates this year to an extent not seen over the past five decades. It believed that the risk of a global economic recession has increased. If central banks around the world all put reducing inflation to target levels as their first priority, interest rate hikes are bound to continue and financial markets will remain under pressure. It is estimated that global economic growth next year may only be 0.5%.

As an open economy on all fronts, Hong Kong will surely be affected in many ways in the face of this austere external economic environment:

1. Hong Kong’s exports will be under further pressure. Hong Kong’s merchandise exports have contracted year-on-year for three months in a row, and the figures to be released for August will show that the decline has continued to widen. Monetary policy tightening around the world will further weaken global economic growth momentum, and it is expected that Hong Kong’s exports will continue to be under challenge.

2. Rising borrowing costs. After the US had increased rates by 3% cumulatively, a number of major banks in Hong Kong raised their prime rate (P) by 0.125% and increased the deposit rates simultaneously last week. Since most small to medium enterprises (SMEs) are using the prime rate as the basis for calculating interest rates on their bank loans, the rise in prime rate means that their financing cost would increase. In fact, borrowings by large corporations and mortgage servicing payments that are calculated on the basis of the Hong Kong Dollar Interbank Offered Rate plus a certain spread, have already increased considerably over the past few months. In response to the changes in the interest rate environment, the Hong Kong Monetary Authority (HKMA) lowered the interest rate stress testing requirement for property mortgage lending from 300 basis points to 200 basis points last week. The new level is regarded as sufficiently prudent from the perspective of effective risk management of banks’ property lending.

3. Financial markets, especially foreign exchange and securities markets, will remain volatile alongside swings in external markets. Fast-moving capital flows, together with emotional responses from the market, may introduce even more unexpected volatility.

4. Asset prices are under pressure. In addition to the repeated pressure on Hong Kong’s stock market this year, overall residential property prices also fell by 6.3% this year up through August. Apart from changes in interest rates, macroeconomic conditions, market supply and demand, investment sentiment and so on all have an impact on asset prices.

As far as Hong Kong is concerned, there has been some good news over the past week. As the number of newly confirmed cases gradually stabilised, after balancing the risks, the arrival quarantine requirement will be relaxed starting tomorrow. This includes lifting the hotel quarantine requirement for inbound persons and adopting a “0+3” arrangement; and allowing passengers to perform rapid antigen tests in lieu of nucleic acid testing before boarding a flight to Hong Kong. Residents and the business community generally welcome the measures. Just as pointed out by the Chief Executive, it is hoped that effective control of the epidemic will let society and the economy have the maximum room for recovery, and Hong Kong will be able to connect with the world and maintain its competitiveness, while inconvenience for those arriving in Hong Kong would be minimised.

The epidemic has been troubling the world for nearly three years, and people flows in other places have been recovering rapidly in recent months. Some people say that they have already seen the light at the end of the tunnel for the global epidemic. However, as WHO Director-General Tedros Adhanom Ghebreyesus said, a marathon runner does not stop when the finish line comes into view, but she runs harder, with all the energy she has left. At this critical moment, we must all sprint for the finish line and actively cooperate to meet the anti-epidemic requirements. At the same time, everyone should speed up preparations for returning to normal, so that as we move towards the “post-pandemic” stage, we can grasp the opportunities brought about by economic recovery.

There is about a week to go before the National Day, on which it just so happens that the second consumption voucher would be disbursed. This will also help boost the consumption demand and benefit retail and catering businesses. I hope that during the holidays, everyone will gather with their families and spend happily to celebrate the 73rd anniversary of the founding of the People’s Republic of China!

September 25, 2022