Date
21 October 2017
Fed Chair Janet Yellen dropped a strong hint last week that an interest rate hike is on the way this month. Photo: Reuters
Fed Chair Janet Yellen dropped a strong hint last week that an interest rate hike is on the way this month. Photo: Reuters

US, China monetary tightening poses risk to HK equities

Financial markets had earlier been factoring in a 30 percent chance for a March rate hike by the US Federal Reserve. Now, after a series of comments from Fed officials, including chair Janet Yellen, the odds are considered to be close to 90 percent.

US economic data has been improving. Figures released last week showed the personal consumption expenditures price index jumping 1.9 percent in the twelve months to January.

As the economy keeps improving, interest rates are bound to rise, may be a few times this year as well as next year.

Three rounds of quantitative easing (QE) have injected massive capital into the global markets and created asset bubbles.

In Hong Kong, the aggregate balance in the local banking system soared to HK$420 billion in 2015 from HK$50-60 billion before 2008.

This figure has declined to HK$260 billion after Fed ended the QE and started hiking rates.

Now, we come to this question: Will further Fed hikes trigger a faster pace of fund outflow from the city?

Meanwhile in China, authorities have cut the M2 money supply target to 12 percent this year from 13 percent in 2016. So the policy stance there is shifting from easy to neutral.

Having witnessed a huge property price surge last year amid easy liquidity, policymakers in the mainland will tend to be more conservative.

If inflation picks up, or if higher US interest rates intensify fund outflow pressure, China may be forced to hike rates too.

Higher rates could hurt corporate earnings as companies will see their costs rise. 

That, in turn, could negatively impact Hong Kong equities, given that a large portion of Hong Kong-listed firms are actually based in China.

The Hong Kong stock market had a good start this year, but the 1,700 point gain year to date could easily reverse if both US and China tighten their monetary policy.

This article appeared in the Hong Kong Economic Journal on March 7

Translation by Julie Zhu

[Chinese version 中文版]

– Contact us at [email protected]

RC

Columnist at the Hong Kong Economic Journal

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