Date
17 December 2017
Asset bubble fears, rising inflation and capital outflow pressure are some of the factors that could prompt further tightening moves by China's central bank. Photo: Reuters
Asset bubble fears, rising inflation and capital outflow pressure are some of the factors that could prompt further tightening moves by China's central bank. Photo: Reuters

Why investors shouldn’t be too complacent about rate prospects

Hong Kong equities surged along with global markets after the US Federal Reserve announced a 25 basis points rate hike and kept its plan for two more rate increments within this year.

Investors took comfort from policymakers’ comments that the world’s largest economy is improving, with more jobs being added and inflation moving toward the central bank’s target.

The market cheer is understandable, but what participants seem to be underestimating is the prospect that the Fed could very well speed up its tightening move.

If the US economy shows sign of over-heating as a result of massive fiscal spending and steep tax cut under the Trump administration, the Fed can always change its mind and turn more hawkish.

Meanwhile, investors seem to have overlooked the fact that rates are creeping up in China too.

Hours after the Fed action, China’s central bank raised the rates it charges in open-market operations and on its medium-term lending facility (MLF).

In January, the People’s Bank of China (PBoC) raised the cost of reverse-repurchase agreements funds and MLF rate by 10 basis points. Now, the central bank has increased the repo and MLF rates by a further 10 basis points, and also raised the rate of its standing lending facility (SLF) short-term loans by 20 basis points to 3.3 percent.

Beijing has already said that financial deleveraging is one of the key tasks this year in order to curb the formation of asset bubbles. The PBoC’s tightening signal is set to impact banks’ lending decisions. Already, there are reports that some banks in Beijing have suspended mortgage lending.

Tighter rates and other policy curbs could take a toll on China’s property market.

Meanwhile, rising inflation and capital outflows are other factors that could force PBoC to tighten.

Coming to Hong Kong, interest rates in the city remain low amid ample liquidity. But if both the US and China embark on further tightening, the situation will change.

US rate hike could lead to capital outflow from Hong Kong in the medium term, while China’s monetary tightening could affect cross-border stock market investments by mainland investors.

Norman Chan, Chief Executive of the Hong Kong Monetary Authority, has warned that higher US rates will impact global capital flows, and that Hong Kong dollar interest rate is set to move up over time given the currency peg.

Investors should not underestimate the impact on Hong Kong asset markets, he added.

Hong Kong equities are enjoying a rally at the moment, but the question is how long can it last?

This article appeared in the Hong Kong Economic Journal on March 17

Translation by Julie Zhu

[Chinese version 中文版]

– Contact us at [email protected]

RC

HKEJ columnist

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