The US economy seems to be on a roll. The job market is strong, as reflected by the 128,000 increase in non-farm payrolls in October, beating the market estimate of 75,000. Meanwhile, the US purchasing managers’ index (PMI) also hit a recent high of 51.3 last month.
On top of such strengths, the United States and China are likely to sign the first stage of a trade deal soon. That would further boost the US economy – and inflation.
No wonder the Federal Reserve hinted after the recent rate cut that there should be no need to lower rates further in the near term.
If the US economy continues to charge ahead, we should not rule out the possibility that the Fed might actually revert to a rate hike cycle.
Under the dollar peg system, the interest rate of the Hong Kong dollar largely moves in tandem with that of US currency.
The system works well when the two economies are in the same cycle. However, this isn’t always the case.
Back in 2008, for example, the US was mired in an economic recession after the financial crisis. The Fed consequently cut interest rates seven times in a row and squeezed dollar rates to nearly zero.
However, Hong Kong’s economy was largely tied to the mainland, and the city was benefiting from the individual visit scheme and southbound capital inflows.
As Hong Kong’s interest rate fell alongside that of the US dollar, an overly easy monetary environment led to an overheating of the local economy and a surge in home prices.
The situation is completely different at present. Hong Kong’s economy has seen mounting pressure from unabated street rallies and structural issues.
Historically, the US has always been the biggest market for Hong Kong’s re-exports. If US economic growth revives, it typically benefits numerous aspects of the Hong Kong economy, including trade, shipping, and the finance sector.
But things are changing. The US and Chinese economies are beginning to decouple in recent years, and more and more exports to the US are manufactured in Vietnam or Bangladesh. Therefore, booming US economic growth may not benefit Hong Kong as much as it used to. Instead, the city could end up taking the hit from a tighter US interest rate policy.
To avoid this awkward situation, Hong Kong has to get its own problems sorted out quickly before it is too late.
This article appeared in the Hong Kong Economic Journal on Nov 4
Translation by Julie Zhu
[Chinese version 中文版]
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