Because the anti-extradition protests enter the fourth month, the market is more and more involved in regards to the liquidity and financial slowdown in Hong Kong. Goldman Sachs’ report has unnerved traders in regards to the monetary stability in Hong Kong. Nonetheless, we imagine the concerns are exaggerated. Financial slowdown, primarily pushed by Chinese language financial slowdown and US-China commerce conflict, may intensify regardless of authorities’s fiscal stimulus.
Goldman Sachs’ latest report about capital outflow from Hong Kong is overblown. Deposits in native forex (HKD) in approved establishments dropped -HK$111.08B, or -1.6%, in August, probably the most extreme since Might 2018. In the meantime, overseas forex deposit in Singapore gained S$1.61B in August, adopted by a record-high S$three.41B improve within the prior month. Overseas forex deposit in Singapore has gained for four months since Might. The report estimated that about US$3B to US$4B (HK$ 23-30B) of deposits has flowed from Hong Kong to Singapore over the previous few months. It concluded that the course of capital stream in Hong Kong would remind a sizzling matter in coming months because the protests proceed and China’s financial system weakens.
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Though deposit in native forex (HKD) slipped, whole deposit elevated barely in August. Capital stream in a single month or two mustn’t trigger panic, specifically when the change is modest. In the meantime, there isn’t any single indicator displaying the liquidity state of affairs of the territory. Interbank liquidity, the commonest gauge of liquidity within the territory, has remained regular since Might.
Whereas staying under LIBOR, the unfold between one-month HIBOR and LIBOR has narrowed considerably over the previous two months. In the meantime, three-month HIBOR is trading above the corresponding LIBOR. Greater rates of interest have a tendency to extend demand for HKD, or at the least cut back the motivation of capital outflow.
The final macroeconomic information reveal vital slowdown in Hong Kong’s financial system. Retail gross sales slumped -23% y/y in August, following a -11.5% decline a month in the past. The PMI report by Markit/IHS means that Hong Kong non-public sector downturn deepened in August “as escalating trade wars and local political demonstrations dampened demand”. The report added that the territory may fall into “recession in the third quarter as business activity is increasingly aggravated by protest-related paralysis”. It expects GDP may contract at “an annual rate of around 4-4.5%”. Officers and media blame that ongoing protests have pushed away vacationers who’re the main supply of retail consumption. In addition they warn of the danger of recession if the motion continues.
The most important pillar of Hong Kong’s financial system is trading and logistics. Regardless of on downtrend since China opens up its market, the sector continues to contribute to over 20% of the financial system. The foremost enterprise of the sector is re-export – performing as gateway for mainland Chinese language and abroad markets on varied sorts merchandises. This sector is severely affected because of US-China commerce conflict. Satirically, tourism (and associated retail and catering enterprise) takes up lower than 5% of Hong Kong’s GDP. In the meantime, an awesome majority of vacationers come from mainland China. It’s extra prudent to attribute financial downturn in Hong Kong to financial slowdown in China and ongoing commerce conflict.
Measures to Help the Economic system
Hong Kong has no autonomous financial coverage because it seeks to peg HKD to USD. Solely fiscal measures can be adopted to stimulate the financial system. The federal government has introduced a bundle price of HK$19B (Zero.6-Zero.7% of GDP), in assist of corporations and family, in August. At 40% of GDP, Hong Kong’s fiscal reserve is ample. Nonetheless, fiscal stimulus is perhaps inadequate to forestall the financial system from falling to recession, given the territory’s over-reliance on Chinese language financial system.