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Hong Kong interest rates and their potential impact on equities and the Hong Kong dollar

Matthew Shim
Matthew Shim6/4/2018 07:30 AM GMT+08  • 9 min read
Hong Kong interest rates and their potential impact on equities and the Hong Kong dollar
SINGAPORE (June 4): Rising US interest rates and expectations of further US rate hikes should inevitably imply an upward trajectory for the Hong Kong Interbank Offered Rate, owing to the established linkages in monetary policy. In Hong Kong, a rising Hibo
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SINGAPORE (June 4): Rising US interest rates and expectations of further US rate hikes should inevitably imply an upward trajectory for the Hong Kong Interbank Offered Rate, owing to the established linkages in monetary policy. In Hong Kong, a rising Hibor impacts mortgage repayments, consumer discretionary spending, the real-estate sector, financials and the local equity market as a whole. Increased mortgage repayments dampen demand in the residential property sector and decrease monthly net disposable income for consumers. This puts a strain on the consumer discretionary sector. Expansion of capitalisation rates and discount rates will put pressure on the value of commercial properties. Real-estate companies could struggle as sales slow. Banks and financial institutions would then be hit, as falling loan demand or higher loan default rates mean a lower return on equity.

Property, construction and financial stocks constituted about 60% of the Hang Seng Index as at March 2018 while mortgages and loans to developers by HSBC accounted for about 51% of total Hong Kong gross loan value, or 14% of total global gross loan value. The HSI reached an 18-year high of 33,154.12 points on Jan 25 this year (see Chart 1). The Hang Seng Property Index was at a five-year daily all-time high on Jan 26 at 44,126.81 points. Property prices in Hong Kong are at an all-time high, with the housing price index at 179.34 points (see Chart 2). Could the Hong Kong market be on its last legs, with a rising Hibor being the key catalyst?

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