Behind China and Hong Kong’s Different Responses to US Interest Rate Hikes

A man wearing a mask walks past a bank's electronic board showing the Hong Kong share index in Hong Kong, on May 23, 2022. Kin Cheung/AP Photo

News analysis

Amid soaring inflation, mainland China and Hong Kong central banks chose to respond in opposing ways to the U.S. Federal Reserve’s aggressive interest rate hikes, with China loosening its monetary policy, and Hong Kong raising interest rates.

On June 15, the Fed raised the primary credit rate by 75 basis points, the largest increase in 28 years. The day after, the Bank of England raised its benchmark interest rate by 25 basis points, the fifth time in 2022.

Following the Fed’s move, the Hong Kong Monetary Authority (HKMA), the city’s central bank, also adjusted its base rate upwards by 75 basis points.

“As the U.S. raised interest rates again, there will be incentives for market participants to conduct carry trades when the Hong Kong dollar and U.S. dollar interest rate differentials are sufficiently wide, driving funds to gradually flow from the Hong Kong dollar to the U.S. dollar,” HKMA Chief Executive Eddie Yue remarked on June 16 after the Fed’s Federal Open Market Committee meeting.

“The Fed’s 75-basis-point rate hike was higher than the expected level conveyed by the Fed after its last meeting, mainly due to the latest U.S. inflation data hitting another 40-year high, but is still consistent with recent market expectation,” Yue added.

Unlike the HKMA, China’s central bank decided to continue its easing monetary policy, according to the Chinese state-run People’s Daily.

In an easing policy environment, the central bank lowers rates to stimulate economic growth. Lower rates lead consumers to borrow more, increasing the money supply. On the other hand, a tightening monetary policy environment, such as rising interest rates, aims to reduce the money supply in order to slow or keep the domestic currency from inflation.

Albert Song, a current affairs commentator and expert on the Chinese financial system, told The Epoch Times that China’s central bank had no choice but to stick to its easing monetary policy owing to the country’s severe economic downturn in April and May. The move was aimed at stimulating its weakened economy.

“However, the policy of stimulating economic recovery has been offset by the country’s zero-COVID policy. As a result, we have not seen any meaningful effect despite Beijing having already launched a variety of economic stimulus measures,” Song added. “It means both the Chinese general public and businesses lack confidence.”

Residential Hong Kong on Dec. 30, 2013. Dale de la Rey/AFP/Getty Images

Real Estate Is Pivotal

The real estate industry is pivotal to China’s economy owing to its many indirect and direct contributions, but it has been on the decline since 2021.

According to China’s National Statistics Bureau, its national housing prosperity index has decreased from 101.18 in May 2021 to 95.60 in May 2022, a significant decrease compared to previous years.

Meanwhile, property sales, investment, and new construction activities declined significantly in the first five months of 2022.

Property sales fell 31.5 percent in the first five months compared to the same period last year, while investment and new construction activities dropped by 4 percent and 30.6 percent, respectively.

With tumbling sales, short-term debts, and a lack of offshore refinancing, Chinese property developers are facing a liquidity crisis.

According to Securities Daily, a Chinese state-run media, between June 1 and 15, at least 11 Chinese property developers announced the disposal of their assets, totaling over $4.5 billion.

The asset disposal happened when more cities introduced stimulus measures to “stabilize the property market.” According to the report, at least 41 Chinese cities issued such guidelines within a nine-day timeframe in early June, a more intensive stimulus effort than in April and May.

Citibank sign boards are seen outside in one of their branches in Hong Kong on Nov. 18, 2008. Mike Clarke/AFP via Getty Images

Negative Impacts

Adrienne Lui Chi-Ngan, a Citibank economist in Hong Kong, believes that Hong Kong’s property market might take six to nine months to digest the full negative impacts of the city’s increased offered rates pushed by the Fed’s aggressive rates hikes. She expects Hong Kong’s property prices to fall by up to 10 percent, according to The Standard, a Hong Kong English-language newspaper.

In terms of mainland China, Song said the property market is already saturated compared to Hong Kong’s. He explained that the short-term property market is dependent on the country’s current economy, while the medium-term is dependent on the land supply.

“China’s property market may improve in the third quarter due to the lag effect of the current easing monetary policy aimed at stimulating the economy. But if there are no improvements in the third quarter, China’s property market likely won’t get better this year,” he said.

Song also addressed the difference between Hong Kong and China’s financial systems, such as the Linked Exchange Rate System (LERS), adopted by Hong Kong on Oct. 17, 1983.

Under the LERS, the exchange rates from the U.S. dollar to the Hong Kong dollar are managed between 7.75 and 7.85 by HKMA, which Song believes may expose Hong Kong to higher financial risks following the Fed’s recent aggressive and continuous interest rate hikes.

As for Beijing’s stringent capital control measures, Song believes that it could reduce its financial risks to some extent, but has no way to stop the outflow of foreign capital.