Hong Kong investors should worry more about the local economy than the situation in mainland China.
The city’s monetary policy follows that of the United States, but its economic fundamentals are grounded in the mainland.
When the divergence of the US and Chinese economies expands, Hong Kong will find itself in a difficult situation.
After 2009, the zero interest rate in the US revived its collapsed property market while resulting in skyrocketing home prices in Hong Kong.
Back then, China’s economy was performing very well. Big Chinese spenders bolstered Hong Kong’s retail and tourism sectors.
Also, mainland companies heeded the government’s “go out” call and made their first overseas push in Hong Kong. Demand for professional talent increased, and as the capital investment entrant scheme took effect, more mainland companies came to list their shares in the city.
At that point, Hong Kong’s economy, especially its property market, was to a certain extent overheating.
But things changed. China’s slowing economy and its anti-corruption efforts have impacted the city’s retail sector. Local watch and jewelry retailers must have felt that deeply.
The capital market is also cooling down. Salary growth in several local pillar industries is decelerating or even start to fall.
The local real estate market was already panicking after the Federal Reserve started raising interest rates. More importantly, a strong dollar is likely to erode the city’s competitive advantages.
Hong Kong should have cut interest rates given the city’s weak economy. However, it has no choice but to follow the Fed’s move given its currency’s peg to the US dollar.
What’s worse is that while the Hong Kong dollar becomes stronger, the risk of deflation increases.
The sudden devaluation of renminbi means the city is likely to import deflation from the mainland. That’s not good for household income and asset prices.
Hong Kong’s fate is not in its own hands. The economy will shift between heaven and hell if the Chinese and US economies cannot synchronize.
I think local companies’ share prices have yet to reflect a worse outlook for the Hong Kong economy in the second half. As for home prices … you know what I mean.
This article appeared in the Hong Kong Economic Journal on Jan. 29.
Translation by Myssie You
[Chinese version 中文版]
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