Cash Flowing Into Hong Kong Keeps Lending Rates Down

The cash that keeps flowing into Hong Kong is keeping interest rates down, say analysts, despite the Hong Kong Monetary Authority’s best efforts to make mortgages more expensive and cool Hong Kong’s red hot property market.

In recent months, money has been flowing into Hong Kong’s capital markets both southwards from the mainland via the stock connect schemes, and from the region more broadly, despite last Friday’s sell off, CNA reported.

This has meant that while the HKMA has followed the US Federal Reserve in raising the base rate three times in the past seven months, the Hong Kong interbank offered rate, or Hibor, has lagged behind the US dollar benchmark, the US dollar Libor (London interbank offered rate).

At the start of this year, three month Hibor and three month Libor stood at broadly similar levels, but as of June 30 the spread had widened to 52 basis points.

The majority of mortgages in Hong Kong are pegged to Hibor, so as that remains low, monthly costs for repaying mortgages also remain low.

There is also no need for banks to change the rates they offer to lenders and savers if so many funds are available. “The cash flowing into Hong Kong means that interest rates are staying low, even though the HKMA wants them to rise,” said Mark McFarland, chief economist in Asia and the Middle East for private bank UBP.

With lending rates low, Hong Kong’s home prices have remained high, and indebted corporates have struggled less than they might have done, while companies that benefit from higher interest rates, for example banks, would not yet have gained all that they might have hoped for from higher rates.

The total number of deposits in Hong Kong in May–the most recent figures available–reached a record HK$12.2 trillion ($1.56 trillion), marginally up from HK$12.1 trillion in April.

“This pickup in growth cannot be explained by an underlying economic pickup,” said Morgan Stanley analysts in a report.

“There has been some pickup in nominal growth, but not enough to justify such a surge in deposit growth. In our view, this pickup has been driven primarily by the strength in capital markets–and the consequent inflow of capital.”

The analysts see both capital inflows into Hong Kong and Chinese equities and southbound flows via the stock connect as the main drivers of Hong Kong dollar deposit growth.