HK Foreign Reserves Down $80 Billion in 2022, Aggregate Banking System Balance Fell Below $13 Billion

Analysis: Shrinking liquidity weighs on housing, stocks, and the economy in general

The Hong Kong Monetary Authority (HKMA) announced on Nov. 7, 2022, that Hong Kong’s official foreign exchange reserve assets at the end of October 2022 were US$417.2 billion. Since the beginning of this year, Hong Kong's total foreign exchange reserve assets have decreased by US$79.7 billion, a drop of 16 percent. Sung Pi-lung/The Epoch Times

Since the beginning of this year, the total of Hong Kong’s foreign exchange reserve assets has decreased by nearly $80 billion, a drop of 16 percent. At the same time, the aggregate balance of Hong Kong’s banking system has also fallen below the “psychological watershed” of $13 billion (HK$100 billion). All these negative data show the liquidity of the Hong Kong market has shrunk, while the Hong Kong dollar interest rate has continued to rise as a result. Some analysts say that this is putting further pressure on the property market and the economy as a whole. Other analysts say that the record high-interest rate reflects that stock market volatility will likely follow.

Drastic Drop of $80 Billion in Foreign Exchange Reserves This Year

The Hong Kong Monetary Authority (HKMA) announced on Nov. 7 that Hong Kong’s official foreign exchange reserve assets at the end of October 2022 were $417.2 billion. According to data previously released by the HKMA, at the end of December 2021, Hong Kong’s foreign exchange reserve assets totaled $496.9 billion. In other words, since the beginning of this year, Hong Kong’s total foreign exchange reserve assets have decreased by $79.7 billion (about HK$625 billion), a drop of 16 percent.

The current level of total foreign exchange reserve assets has fallen close to its level at the end of December 2018 to $53.2 billion (HK$417.5 billion). Moreover, the proportion of total foreign exchange reserve assets in Hong Kong dollars, as a percentage of M3 money supply, has also dropped from about 48 percent at the end of December last year to about 41 percent today.

Banking System Aggregate Balance Shrinks by More Than 70 Percent in Half a Year

Not only did foreign exchange reserves drop, but the aggregate balance of the banking system, which reflects the liquidity of Hong Kong’s banks, also fell below the $13 billion (HK$100 billion) level.

Incidentally, the exchange rate of the Hong Kong dollar continued to be weak, repeatedly falling to the low-side conversion guarantee level of HK$7.85. According to the Linked Exchange Mechanism, the HKMA has undertaken 40 Hong Kong dollar selling orders since May 12, totaling $30.72 billion (HK$241.171 billion). The aggregate balance of Hong Kong’s banking system fell to $12.35 billion (HK$96.977 billion ) on Nov. 8, below the psychologically critical $13 billion (HK$100 billion) mark.

Liquidity has shrunk by more than 70 percent in half a year, based on the aggregate balance of the banking system of around $337 billion in mid-May.

With HIBOR Keep Going Up, HK Banks Raise Interest Rates Again

Eddie Yue Wai-man, Chief Executive of the HKMA, said in a document on Nov. 3 that as the United States continues to raise interest rates, the carry trade caused by the widening of the Hong Kong-U.S. interest rate gap will drive funds to gradually flow from the Hong Kong dollar to the U.S. dollar, so the weak exchange rate of the Hong Kong dollar is a normal phenomenon. When the weak-side convertibility guarantee is triggered, the HKMA will buy Hong Kong dollars and sell U.S. dollars according to the linked exchange mechanism. Such financial decisions undertaken will cause the aggregate balance of the banking system to decrease accordingly. As a result, the Hong Kong dollar interest rate will gradually rise, offsetting the incentives for carry trades, and should finally stabilize the Hong Kong dollar back to the 7.75 to 7.85 range.

He also pointed out that if the United States continues to raise interest rates, he believes the Hong Kong dollar interest rate will follow its upward trend too.

On Nov. 3, the U.S. Federal Reserve announced that it would raise interest rates again by another 0.75 percent, and the one-month Hong Kong dollar rate related to Hong Kong housing mortgages was 3.21 percent on that day, close to a 14-year high. Very soon, HSBC and other Hong Kong banks will likely announce interest rate hikes one after another. This is the second time the Hong Kong bank has raised interest rates this year, with a cumulative increase of 0.375 percent.

HK Bank Interest Rate Hike Puts More Pressure on Property, Stock Markets, and Economy

After the Hong Kong banks raised interest rates for the second time, the top ten housing estates on Centaline Property Agency’s book recorded just 4 transactions over the weekend of Nov. 5 and 6, which fell 42.9 percent week-on-week and hit an 18-week low.

Louis Chan Wing-kit, the vice chairperson of the Asia Pacific region and executive director of the residential department of Centaline Property Agency, pointed out that the rise in interest rates will increase the burden on mortgage repayments, which will make the property market even worse.

He further pointed out that in the first 10 months of this year, the transaction volume of newly built and second-hand transactions dropped by 31 percent and 39 percent, respectively, compared with the same period last year. At the end of the third quarter of this year, 533 residential mortgage loans turned negative equity was recorded in Hong Kong, hitting a six-year quarterly high. The number of foreclosed properties increased to 209 units, the first time in 13 years that it exceeded the 200 level. All such data no doubt show that the real estate market as a whole has sounded a dire alarm.

Samuel Tse, an economist at DBS Bank in Hong Kong, told The Epoch Times that in the first 10 months of this year, Hong Kong’s property prices fell by 8.9 percent overall, and in October alone, they fell by 1.4 percent, reflecting the acceleration of the decline in property prices. With the economic outlook uncertain, combined with the impact of the brain drain and interest rate hikes, it is expected that the downward trend of the Hong Kong property market will continue.

The pressure due to rate hikes is not just felt in the property market. The stock market is another victim affected by the rise in interest rates. Hong Hao, chief economist of hedge fund GROW Investment Group in Hong Kong, issued a document on Nov. 7 that Hong Kong’s three-month HIBOR has soared to the highest level since 2007, indicating that market volatility is imminent, and global market volatility is about to heat up gradually, although such volatility may originate from the U.S. market.

Three-Month HIBOR Rose 1.06 Points to 4.78 Percent on Nov. 7

As for the overall economic impact, Samuel Tse of DBS said that the interest rates hike by the banks of Hong Kong will have a relatively negative impact on the Hong Kong economy. Since Hong Kong’s GDP contracted by 4.5 percent in the third quarter, of which local gross fixed capital formation fell by 14.3 percent year-on-year, reflecting a very uncertain economic outlook. This is especially worrisome as the mainland’s zero-COVID policy is still alive, and the China-Hong Kong customs clearing is nowhere in sight. There is uncertainty in the economic outlook.

Since the beginning of this year, Hong Kong’s economy has contracted for three consecutive quarters. In the first two quarters of this year, it contracted by 4 percent and 1.3 percent year-on-year, respectively.