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Rate hikes and sovereign wealth losses cloud Hong Kong's economic picture

A slowing economy, higher interest costs, and a poorly performing de facto sovereign wealth fund all cloud Hong Kong's outlook in the second half of 2022.
Rate hikes and sovereign wealth losses cloud Hong Kong's economic picture

Hong Kong is having to weather a series of negative economic and financial blows as it faces into the second half of 2022 and beyond.  

Interest rate hikes, slower economic growth and the record loss of its de facto sovereign wealth fund, the Exchange Fund, have all come together and  signal that the economy still has some hurdles to clear before it can start to grow robustly. 

On July 31, Financial Secretary Paul Chan warned he may have to lower the city’s full-year GDP growth forecast again due to the worsening of global economy. At the time of the budget in February, he had set the growth target at 3.5% but has already cut this to between 1% and 2%.

Three days before Chan's warning about growth, Hong Kong’s de facto central bank, the Hong Kong Monetary Authority (HKMA), raised local interest rates to 2.75%, their highest level since 2019, by copying the Federal Reserve's decision to hike US rates by 75 basis points for the second consecutive month. At the same time,  HKMA chief executive Eddie Yue warned of further interest rate hikes in coming months.

RECORD LOSS

The Hong Kong dollar’s currency peg to the US dollar has upped the pressure on the HKMA's Exchange Fund to defend the Hong Kong dollar’s trading range between HK$7.75 to HK$7.85 to the US dollar. HKMA has done so 23 times since May this year because of a strong US dollar.

HKMA announced on July 29 that the Exchange Fund had recorded an investment loss of HK$144.2 billion ($18.4 billion) in the first half of 2022 amid the slump in global bond and equity markets.

It was the fund’s biggest investment loss since it started to report half-yearly in 2004.

It lost money in almost all asset classes: HK$55.9 billion in bonds, HK$8.5 billion in Hong Kong equities, and HK$73.2 billion in other equities.

The unfavourable foreign exchange on non-Hong Kong dollar assets also contributed HK$12.8 billion to the losses.

It made only HK$6.2 billion of gains from other investments, but this was down to the change in valuation of the investments held by subsidiaries up to the end of March. Second-quarter data are not yet available.

The Exchange Fund's total assets stood at HK$4.21 trillion ($536.3 billion) at the end of June 2022, decreased 7.9%, or HK$359.7 billion from the end of 2021. Accumulated surplus stood at HK$607.9 billion.

Eddie Yue, HKMA

The HKMA does not disclose its return rate of investment, however, Yue noted that the investment loss of HK$144.2 billion accounted for 3.4% of the total assets, which is smaller than the losses registered by global bond and equity markets.

He pointed out the Bloomberg Global Aggregate Total Return Index was down 14%, and the MSCI All Country World Index by 21% in the first half of 2022.

“Looking ahead into the second half of 2022, challenging global investment conditions will continue to linger,” Yue said. “We believe the investment environment will continue to be tough for the remaining part of the year.”

“Notwithstanding the volatile market conditions, the Exchange Fund will adhere to its investment principle of ‘capital preservation first while maintaining long-term growth’ without being distracted by fluctuations in short-term returns,” he said.

“The HKMA will continue to diversify investments to further stabilise the Exchange Fund’s returns with a view to achieving its long-term investment objectives,” he added.

STILL HOPE

Although Hong Kong didn't perform well economically and financially in the first half of 2022, Tai Hui, chief market strategist, Asia Pacific at JP Morgan Asset Management believes that more than other factors, reopening the economy, will provide Hong Kong with its biggest growth momentum in the second half.

Tai Hui, JP Morgan AM

“In the next six months, the most important area is going to be on the progress of us reopening our borders and reopening our economy,” said Hui.

“Whether that's with China or with other economies around the world, I think that will give us a bit more of growth momentum. So, I would say I'm cautiously optimistic [about Hong Kong economy],” Hui said.

The local market is focusing on whether its commercial banks will raise their prime rates following HKMA’s rate hike, which could add pressure to the housing market.

“The liquidity situation in Hong Kong still allows a bit of a spread between US dollar interest rates and Hong Kong dollar interest rates, which means that commercial banks in Hong Kong don't yet have the urgency to raise their prime rates yet,” said Hui.

“Obviously that could put some pressure on home prices, but HKMA has done a lot of work on macroprudential measures trying to manage mortgagees’ ability to service their debt,” he said.”

“I'm not expecting a significant default in Hong Kong housing market,” he said, noting that interest costs are still relatively low in Hong Kong.

¬ Haymarket Media Limited. All rights reserved.
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