27/4/2018-10

Ping Ping: The property market turned from the receipt of goods from the HKMA

After waiting and waiting, I hope that Mr. Chen Delin, the president of the HKMA, can finally take over the Hong Kong dollar offer, and that he will receive nearly HK$10 billion (in four deliveries). This shows that the HKMA is still effective under the Link Exchange system. On the other hand, it can be said that the process of normalizing interest rates has officially started and raising interest rates is no longer out of reach.

The Hong Kong-US interest rate differential cannot be maintained for a long time

It is no exaggeration to say that Mr. Chen “hopes" that the HKMA can enter the market and buy Hong Kong dollars. As early as more than a month ago, Mr. Chen had exposed his reputation on the blog. He pointed out that the Hong Kong dollar interest rate differential caused an increase in interest-carrying activities. According to the link mechanism, the Hong Kong dollar will weaken, and investors will expedite the Hong Kong dollar to buy the US dollar. The Hong Kong Monetary Authority will buy Hong Kong dollars to lower the bank’s balance, eventually prompting the banks to raise interest rates, and Hong Kong will begin to follow the United States to enter the interest rate increase cycle. However, the process of normalizing this interest rate has only heard the stairs ringing and has not seen people go downstairs. The exchange rate of the Hong Kong exchanges has been approaching the bottom line of 7.85 but it has never been touched. This has made the HKMA unable to do anything. The normalization of interest rates in his mouth is no mean exception. How can President Chen not be emboldened?

At the end of last week, Hong Kong Exchange finally broke through the 7.85 bottom line. Some people in the market successively sold nearly 10 billion Hong Kong dollars, which finally allowed Chen to reach an agreement. Imagine the HKMA acting as the Central Bank. However, the “Central Bank" has not only the ability to control the exchange rate (the exchange rate fixes the exchange rate of the Hong Kong dollar against the US dollar). Even interest rates cannot affect the central bank officials.

Another reason why Mr. Chen hopes to enter the market to normalize interest rates is that the Hong Kong-U.S. interest rate differential cannot be maintained for a long time and continues to increase. The United States hasn’t followed interest rate hikes six times in a row, but according to the linkage mechanism design, Hong Kong’s interest rates will one day follow the ups and downs. The later this process begins, the speed and magnitude of the addition may be even greater in the future, and the shocks caused are quite trivial. Mr. Chen and the HKMA naturally hope that the process of raising interest rates will start early and let the society gradually absorb the impact of raising interest rates.

The Hong Kong Monetary Authority’s attempt to undertake the Hong Kong dollar offer may not necessarily lead banks to raise interest rates immediately. After the market was introduced, the interbank interest rate rose only slightly. However, the interest rate spread between Hong Kong and the United States has already reached one and a half cents. In addition, the United States will raise interest rates at least twice this year. The spread widens further and forces more funds to be converted into US dollars to make the Hong Kong dollar weaken further. The HKMA needs to Continuous receipt of goods, so that the bank balances continue to shrink, it will soon become a fact of raising interest rates.

In addition to the normal interest rate of the linked exchange mechanism, the outflow of funds may also be exacerbated in the short-term due to geopolitical risks and the asset markets including the stock market. In fact, in recent weeks, global stock markets, including Hong Kong stocks, not only fluctuated sharply, but also caused the transaction to shrink the shady state of the market decline; this will prompt more funds to flow out of Hong Kong stocks and Hong Kong. Coupled with the tit for tat on multiple issues between Europe, the United States, and Russia, the risk of risk aversion is even higher, and it will become more and more obvious that the risk of reverting to safe-haven currency and returning to developed countries.

Hong Kong household debt ratio keeps rising

It should be noted that a large proportion of Hong Kong’s huge banks’ fund balances are looking for investment opportunities. Once the investment climate deteriorates, they will leave Hong Kong to search for new areas to invest or avoid the wind, and will no longer accept the Hong Kong-US interest rate gap. At that time, the Hong Kong dollar interest rate may rise more quickly than expected, and the first property will be the unattainable property market.

In fact, the crazy property market in Hong Kong depends entirely on the ultra-low interest rate environment and the irrational exuberant support derived from it. At present, over 10 million residential units abound, and the 5, 6 million home ownership flats are almost at a minimum. A 10 million unit will still have to pay 5 million contributions even if it pays 5 million downpayments. If the interest rate rises by 1 percent, the monthly contribution will increase by 2,500 yuan for the 5 million contribution (25-year mortgage); Half a month, the monthly contribution will increase by 4,000 yuan. If the initial $5 million is raised by the “parent father” plus the original residential unit, the extra interest burden may exceed 6,000 yuan, and it is self-evident that the damage to the property market will be undermined.

From the perspective of macroeconomic conditions, the debt ratio of Hong Kong households has long been rising. In 2016, it rose to 67.1% of GDP, and in January this year it had risen to 69.1%. Once Hong Kong enters a rate hike cycle, companies and households that are heavily indebted will definitely have to meet the demand for investment and consumer spending to meet their repayment needs. Economic activity will certainly be hit and economic growth will be hampered.

This time, the HKMA’s acceptance of the Hong Kong dollar offer is unlikely to be affected by the flood of water. However, the pace of capital investment has never been expected to be shorter than 48 hours at the end of last week. The bank balance has been reduced by more than 5%, reflecting the fact that interest rates have turned In front of the eyes, the hot property market and economy will also turn around.