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Hong Kong follows Fed to raise interest rates for the first time since 2018

Asia has seen some relief as market sentiments improve in Hong Kong and China. Hong Kong’s Hang Seng has risen to 21,246.76, adding a previous 9.1% gain. The Nikkei also experienced growth and rose to 25,508.88, while the Shanghai Composite Index climbed by 2.6% to 3,252.96.

The Hong Kong Monetary Authority has moved to follow the Fed and raised interest rates by 25 basis points (0.75%) to cool inflation. It is the most significant jump since 2018. It is predicted that the Fed will have seven rate climbs for 2022 of 25bp each and 3.5 increases in 2023. It should result in a Fed fund rate of 2.75% between 2023 and 2024. According to financial services law-maker Robert Lee Wai-wang, ‘An interest rate rise adds to the burden of mortgage, corporate and personal lending borrowers’. It will also add cost for ‘investors who borrow margin loans to trade stocks or initial public offerings’.

 

It is expected that the Hong Kong interbank offered rate (Hibor) will experience a 0.4% increase soon and a 0.8% hike during the second half of 2022. Anyone with a Hibor-linked mortgage can expect increased repayments.

 

Eric Tso Tak-ming, chief vice president of mReferral Mortgage Brokerage Services, however, said that ‘the rate increases may raise the repayments for mortgage borrowers, but the level will remain affordable for most’. It is vital to the economy for residents to be able to afford housing.

 

Soaring house prices has been an ongoing issue for Hong Kong residents in the past decade, with one square foot costing an average of 21,600HKD (2,700USD)for private housing complexes on Hong Kong Island. This means that a 500 square foot apartment can easily cost upwards of 10 million HKD (1.3 million USD). On the other side of the coin, public housing demand has overwhelmed the government’s supply, and many are on waitlists for a flat for up to five years.

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The city’s largest commercial banks, HSBC, Standard Chartered, and the Bank of China, have not changed their lending rates yet, allowing the public to pay as much of their mortgage as possible before rates increase.

 

The increase in global commodity prices has meant that trade terms in China have declined. Currently, 40% of natural gas, 70% of crude oil, and many other materials and resources are being imported by China. The rise in costs of imported products has had detrimental effects on the Chinese economy. Should crude oil prices reach above $130 per barrel, the government will be forced to subsidise refineries for them to continue with production.

 

The COVID situation in Hong Kong and mainland China has worsened, with both cases and mortality rates rising. During a Chinese Communist Party meeting hosted by Xi Jinping, it was reiterated that ‘more effective measures should be taken to achieve maximum effect in prevention and control with minimum cost and reduce the impact on socio-economic development as much as possible’. This follows the resumption of public transportation in 5 of the ten city regions, afterfears that any further spread of the disease may harm the Chinese economy further.

 

Focus has also shifted in China to increased spending on infrastructure and monetary easing.Due to anticipated economic risks, there has been talk of the authorities hastening the front-

loading of infrastructure spending during the first half of 2022.

 

Amidst the current crises, the Chinese authorities have pledged to ‘invigorate the economy’ by assisting the real estate industry, entrepreneurs, and tech companies. Anxieties are high among investors as economic growth is threatened by Russia’s war on Ukraine, more COVID outbreaks, and increased commodity prices.

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