Interest rates in Hong Kong are shooting up at a rapid rate, reviving concerns over the richly valued local property market, warned analysts.
Three-month Hibor, the short-term interbank lending rate in Hong Kong, has jumped in the past couple of weeks by more than 20 basis points to reach 2 per cent. The rate had climbed since mid-April, when it was languishing at just above 1 per cent.
Some analysts said the rate has increased faster than anticipated, stoking concerns about pressure on borrowers as most mortgages in Hong Kong are tied to Hibor.
“What has surprised me is the speed at which it has happened,” said Max Lin, emerging market Asia strategist at NatWest Markets. “Hibor has risen faster than expected.”
The increase came before the US Federal Reserve boosted the funds rate on Wednesday by 25 basis points to 2 per cent.
Hong Kong’s currency board system, pegged to the US dollar, meant the Hong Kong Monetary Authority followed the Fed’s lead, increasing its base rate on Thursday morning to 2.25 per cent.
The higher base rate, the level at which banks borrow from Hong Kong’s de facto central bank, puts upward pressure on Hibor.
“I still think Hong Kong property is driven by a lot of demand from mainland China and supply is restricted, but there should be concern as rates go up, as it does result in property valuations coming down,” said Mr Lin.
Recent actions by the HKMA to support the local currency have reduced liquidity in Hong Kong. Persistent intervention since April is part of its mandate to support the local currency once it hits HK$7.85 against the US dollar.
Chang Liu, China economist at Capital Economics, said he expected three-month Hibor to rise to nearly 3 per cent by the end of next year. “This would put Hong Kong’s overheated property market under strain: about 90 per cent of new mortgages in Hong Kong are priced off interbank interest rates.”
Other factors have spurred the recent jump in Hibor. Analysts point to the pipeline of initial public offerings that are expected in Hong Kong in the next few months, including the listing of smartphone maker Xiaomi, which could raise as much as $10bn and float within the next few weeks.
Investors borrow cash to invest in over-subscribed flotations, which tightens funding conditions and puts upward pressure on Hibor.
“We’re a bit concerned specifically for this month-end; with the Xiaomi listing, we could get a bit of a squeeze up in Hibor,” said Cliff Tan, east Asian head of global markets research at MUFG.
Ronald Man, a strategist at Bank of America Merrill Lynch, said: “The recent squeeze in Hibor is due to seasonal demand for Hong Kong dollar funds, expectations of tighter global monetary conditions and expectations of large IPOs.”