(1) Fed Raises Interest Rates
To fight inflation and high prices, The U.S. Federal Reserve (FED) raised the federal funds rate by 0.75 percent four times in succession. It raised interest rates by a cumulative 4.25 percent in total in 2022, rising to 4.25 percent to 4.50 percent from 0 percent to 0.25 percent in early 2022, the most fierce policy increase since 1980.The Federal Reserve Chairman Jerome Powell said the Fed aims to bring inflation back to its two percent target. Before that, the Fed will continue to press forward with increases, and officials have penciled in a 5.1 percent funds rate for next year.
Central banks around the world are tightening monetary policy. The U.S. dollar has strengthened against nearly every other major currency. The Bank of Japan remained committed to its ultra-loose monetary policy until late in the year. The Japanese yen (JPY) kept weakening and once touched a 32-year low. The JPY depreciated, and the JPY/Hong Kong dollar (HKD) once saw 0.0516. The Bank of Japan recently made a surprise policy tweak, and the JPY is rebounding rapidly. The exchange rate of JPY/HKD surged to 0.06 but has fallen back to 0.0519.
In 2022, the offshore Chinese yuan fluctuated and weakened in the second half year. The yuan fell to seven to the dollar in September and weakened past 7.37 per dollar in October, hitting a new low. However, since November, the FED expected to switch to smaller interest rate increases, and as the CCP gradually lifted its COVID-19 restrictions, the yuan recovered in the past two months. The yuan recovered to seven per dollar in early December but fell by about 10 percent in 2022. The rate currently stands at 6.8 to the U.S. Dollar.
(2) Russo-Ukrainian War and the Energy Crisis in Europe
On Feb. 2, when Russia invaded Ukraine, the price of commodities, such as critical raw materials and crops, surged. The Organization for Economic Cooperation and Development (OECD) said the world continued to pay a high price for Russia’s war of aggression against Ukraine, including slowing down the global economy and broadening inflation. There is no sign of the Russia-Ukraine situation ending, even stepping into 2023, which is predictably further boosting the price of energy resources, especially in Europe.
To sanction Russia, countries in Europe and America refused to purchase crude oil and natural gas from Russia. Recently, a price cap on Russian oil has been implemented that limited the price surges driven by the war. The soaring energy price in Europe broke a new record high in September 2022, and the winter recession is in accordance with the broader economic crisis. German and French energy prices soared to new records, surging to 850 and 1,000 euros per megawatt, respectively— a ten-times increase from 85 euros per megawatt hour (MWh) a year ago. British energy bills also jumped 80 percent in 2022.
(3) Hong Kong Hang Seng Index and Pension Funds Hammered
Hong Kong Hang Seng Index (HSI) dropped from 19,741 points at the beginning of the year to 14,687 on Oct 31 but continued to recover until the end of the year to finish the year at 19,781. The Dow Jones Industrial Index (DJI) dropped around 10 percent.The mandatory provident fund schemes authority (MPFA), mandatory pension funds in Hong Kong, released the Quarterly Report of September 2022. As of the end of September, MPF Schemes had around 965 billion HKD of the aggregate net asset value of all schemes, dropping 1.8 percent below inflation rate year-on-year. Reviewing the recent five years, the same value was 14.9 percent in 2017, 28 percent in 2020, and the rest were all negative figures.
According to the number of claims of MPF benefits by grounds of withdrawal, there were 8,600 cases of permanent departure from Hong Kong (there were a total of 24,700 permanent departure withdrawal cases in Q1-Q3), and the withdrawal amount for permanent departures was 2.177 billion in Q3 and 6.306 billion in total for Q1-Q3.
Furthermore, according to the MPFA quarterly report in December, retail banks’ aggregate pre-tax operating profit declined by 11.7 percent year on year in the first three quarters of 2022. This was mainly attributable to an increase in bad debt provisions and a decline in income from fees and commissions.
(4) UK’s Mini-budget
In September 2022, UK’s former finance minister Kwasi Kwarteng set out a “mini-budget” plan proposing significant reductions in taxation. This shook the financial markets and resulted in a plunging pound and massive gilt sell-off, which forced the UK central bank to promptly intervene to avoid a financial crisis. After days of debate, UK Prime Minister Liz Truss sacked Kwarteng and let Jeremy Hunt take over his role. Kwasi was fired just 38 days after Liz had taken over as Prime Minister. Her tenure was the shortest tenured of any British finance minister.
(5) Sino-US Chip War
Impacted by COVID-19, the chip industry was hit with a shortage of semiconductors affecting vehicle and electronic production. High-level computer chips not made in China are also needed for defence and aerospace projects. With the worsening relations between the U.S. and China. In August 2022, U.S. President Joe Biden signed the CHIPS Act and committed to investments in American semiconductor chip manufacturing. President Biden further banned the exports to China of cutting-edge chips in October 2022 and encouraged Taiwan, Japan, and Korea to join a U.S.-led chip alliance ‘Chip 4,’ suppressing the major countries from selling chips to the CCP. On Dec. 6, 2022, TSMC, the world’s biggest chipmaker, increased its investment in Arizona, which is building a chip facility, to $40 billion.
(6) Hong Kong Banks Prime Rates Rise, Property Prices Fall
Due to the linked exchange rate system, the major HK Management Association has raised the monetary Base Rate successively in line with the Federal Reserve. HK banks however only started to raise their prime lending rates in September 2022, the first time since September 2018 following the U.S. interest rate. The prime lending rate rise in September was 0.125 percent, and the prime rate was increased again in November and December 2022 by o.250, making a total rise of 0.625 percent interest rates were raised in 2022. The prime lending rates were 5.625 percent and 5.875 percent, respectively. The annual interest rate for current deposits of HKD 5,000 and above in general banks is increased to 0.625 percent. After the interest rate increase, the current market mortgage rate ranges from 3.375 percent to 3.625 percent.In view of the property price, the latest Centaline City Leading Index CCL reported 156.37 points on Dec. 18, which hit a five-year low, and 15 percent fall has been recorded in 2022.
(7) FTX Bankruptcy
(8) Closure of Hong Kong Stores
The pandemic has had a huge impact on the consumer-related industry in Hong Kong. business closures and wage arrears occurred repeatedly. In early June 2022, the 30-year-old Hong Kong snack food franchise Aji Ichiban was shut down. In mid-September, Hong Kong bakery chain Crostini closed all its retail outlets. Other famous restaurants, coffee shops, travel agencies, and bookstores continued to close one after another.(9) China’s Real Estate Crisis
Evergrande in China defaulted on dollar-bond payments after liquidity scares that began in 2020 and continued through 2022. The Chinese property sector crisis sparked by the Evergrande default spread beyond it to different major property developers. At least three real estate companies were affected and faced a financial crisis. Cifi Holdings (00884. HK) announced its failure to make payments due on offshore debts in October 2022; Longfor Group Holdings was suspected of a delayed payment of bills in August, and its stock price dropped rapidly as its founder Wu Yajun announced her retirement in November; Country Garden Holdings hit a low point at the beginning of November 2022 showing a loss of 90 percent of its value, but its share price has been recovering in the last two months(10) CCP’s Enforcement of Strict Lockdown Measures
The CCP continued its zero COVID-19 policy throughout the year, causing the temporary closure of many mainland factories and massive supply chain issues.Many public grievances and disputes occurred in 2022. During the outbreak at Foxconn Zhengzhou, employees protested and walked out, complaining of unsafe working conditions, which slowed factory production. The CCP suddenly lifted all restrictions just a few days ago, causing multiple epidemic outbreaks, overwhelming the health system and crematoriums, and a massive rise in deaths.
