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Hong Kong eases monetary policy as economy slips into recession, prompting city's banks to cut rates for the first time in 11 years

Enoch Yiu enoch.yiu@scmp.com

Hong Kong's monetary authority cut its base lending rate for the third time in as many months in lockstep with the US Federal Reserve, and keeping with the trend of global central banks loosening their financial taps to avert the world economy's descent into recession.

The city's base lending rate will be reduced by 25 basis points to 2 per cent effective immediately, the Hong Kong Monetary Authority (HKMA) announced on its website, matching the overnight cut of the same amount by the US Fed. That prompted HSBC, Standard Charted Bank and Bank of China (Hong Kong) - the city's three note-issuing banks, to cut their rates for the first time in 11 years to take the pressure off small businesses.

Hong Kong's economy shrank 3.2 per cent in the third quarter from the same period last year, its worst quarterly contraction in a decade, putting the city in a technical recession, according to a government statement Thursday.

"As the largest commercial bank in Hong Kong, HSBC has the social responsibility to help Hong Kong companies to cope with the difficult time," said the bank's Asia-Pacific adviser George Leung, during a press conference. "The cut may be small, but it could still be able to lift the burden of the companies and stimulate private consumption."

Hong Kong's monetary policy has mirrored the US ever since the city's currency was pegged to the US dollar in 1983 under the currency board system. The joining at the hips of Hong Kong's interest rates with America's cost of funds has led to unintended consequences for the city's economy, curtailing the HKMA's ability to use monetary policy as a tool to curb inflation, or asset prices.

An estimated US$130 billion of foreign capital poured into Hong Kong's assets during the previous cycle of interest rate cuts in the aftermath of the 2008 crisis, setting off a decade-long property bull run that drove home prices to the highest among global urban centres. Unaffordable housing has been cited as one of the biggest grievances that have fuelled street protests among the youth in Hong Kong's most severe civil strife that is running into its fifth month. At least US$4 billion of capital has exited the city in current turmoil by one estimate.

The Hong Kong Monetary Authority's Chief Executive Officer Eddie Yue Wai-man during a press conference on 29 January 2018. Photo: David Wong alt=The Hong Kong Monetary Authority's Chief Executive Officer Eddie Yue Wai-man during a press conference on 29 January 2018. Photo: David Wong

In its decision to cut rates, the Fed dropped a previous reference to "act as appropriate" to sustain economic expansion " considered a sign for future rate cuts, Reuters reported. Instead, the Fed said it will "monitor the implications of incoming information for the economic outlook as it assesses the appropriate path" of its target interest rate, a less decisive phrase.

While the Fed's decision reflects concerns about global slowdown, the continuation of the policy easing cycle remains uncertain, said HKMA's chief executive Eddie Yue Wai-man. Hong Kong's open economy is not immune to global uncertainties and will face slowdown pressure, he said.

China manufacturing slumps for sixth straight month, October PMI below expectations

"We have not seen any signs of massive capital outflows as the Hong Kong dollar exchange rate remains stable," Yue said at a media briefing after the policy decision. He does not believe the interest rate cuts so far will lead to an overheating in the local property market. "Banks' asset quality remain good," he said. "The bad debt ratio stays at around 0.56 per cent which is low" by international standards, he added. "Property prices have dropped by 4 to 5 per cent since May but the secondary market transactions have become active again over the past two weeks."

The 3.2 per cent contraction in Hong Kong's economy, based on advance estimates from the statistics office, was deeper than the 0.6 per cent forecast by economists. It follows the 0.4 per cent slump in the second quarter. The two consecutive periods of negative growth officially puts Hong Kong in its first recession since the 2008 Global Financial Crisis.

To arrest the slide, the HKMA has cut interest rates by a total of 75 basis points since August, reducing the cost of money for a city economy squeezed between the US-China trade war and five months of anti-government protests.

HSBC will cut its best lending rate to 5 per cent, from 5.125 per cent, effective November 1, the first time it's reducing the cost of money since 2008. The bank's savings rate for US dollar deposits would be cut to 0.001 per cent, from 0.10 per cent.

"The savings rate is close to zero," Leung said. "Even if the US Fed continues to cut interest rates, there is no room for HSBC to cut rate any further."

Standard Chartered said it would cut its best lending rate by 12.5 basis points to 5.25 per cent, while the deposit rate on Hong Kong dollar savings would be cut to 0.001 per cent per annum, effective November 1.

Visitor arrivals to the city have plummeted, causing retail sales to plunge and driving up vacancy rates at hotels, restaurants and stores across the city. More than 200 restaurants have shut, and one in 10 stores in Causeway Bay, until six months ago still the world's most expensive retail strip, now stand empty.

"Many SMEs, particularly those in the restaurant, retail and tourism industry, are hard hit," HKMA's Yue said. "The HKMA has urged the banks to adopt policies to help SMEs with their lending."

Nine of Hong Kong's biggest lenders pledged their support two weeks ago to the HKMA's push to help 330,000 small and medium enterprises (SMEs), defined as businesses each with fewer than 50 employees, to survive the city's economic slump.

This includes maintaining their credit queues, and make good use of HK$300 billion released into the financial system on October 14 as the de facto central bank reduced the countercyclical capital buffer (CCyB) ratio by 50 basis points to 2 per cent, the first reduction since 2015.

The latest rate cut will also cut the cost for investors who need to borrow money to subscribe to initial public offerings (IPOs), as a string of deals follow two recent mega stock offerings. The Hang Seng Index has risen over the past two months, bringing this year's gain to 3.3 per cent.

China Feihe, whose baby milk formula is endorsed by actress Zhang Ziyi, this week kicked off an IPO to raise up to HK$8.93 billion (US$1.14 billion). If it can be priced at the top end, it will be the third-largest IPO this year only after Budweiser Brewing Company APAC's US$5.8 billion sale in September and ESR Cayman's US$1.6 billion sale.

The HKMA's base rate cut would lead to a modest reduction in mortgage rates for borrowers whose loans are priced according to the city's interbank offer rates, or Hibor. Commercial banks, however, may not cut their prime rates, which now stand between 5.125 per cent and 5.375 per cent, said DBS Banks' managing director Tommy Ong, speaking before the rate cuts.

This article originally appeared in the South China Morning Post (SCMP), the most authoritative voice reporting on China and Asia for more than a century. For more SCMP stories, please explore the SCMP app or visit the SCMP's Facebook and Twitter pages. Copyright © 2019 South China Morning Post Publishers Ltd. All rights reserved.

Copyright (c) 2019. South China Morning Post Publishers Ltd. All rights reserved.