Is Hong Kong really over as a financial centre?

by Shaun Richards

Today I thought I would take a slightly different tack and look at a potential shift in world financial markets. It concerns a place that for many years has had an economic party based on “location, location, location” as Hong Kong has been a sort of add-on to China. We have previously looked at the economic consequences of the unrest there and now the ante is being upped by China. This poses the question can it survive as one of the world’s major financial centres?

BEIJING (Reuters) – China’s parliament on Thursday overwhelmingly approved directly imposing national security legislation on Hong Kong to tackle secession, subversion, terrorism and foreign interference in a city roiled last year by months of anti-government protests.

Also I do not know about you but the 6 were brave and the 1 was courageous.

The National People’s Congress voted 2,878 to 1 in favour of the decision to empower its standing committee to draft the legislation, with six abstentions. The legislators gathered in the Great Hall of the People burst into sustained applause when the vote tally was projected onto screens.

If we switch to Hong Kong itself there is plainly trouble ahead.

Earlier on Thursday, angry exchanges in the city’s assembly, the Legislative Council, during debate on the anthem bill saw some lawmakers removed in chaotic scenes and the session adjourned.

If we look wider there is of course The Donald to consider.

WASHINGTON (Reuters) – U.S. President Donald Trump said on Tuesday the United States was working on a strong response to China’s planned national security legislation for Hong Kong and it would be announced before the end of the week.

So quite a bit of realpolitik and this adds to the Trade Wars issue. Not exactly what you want when you are a hub for financial trade.

Rich Chinese are expected to park fewer funds in Hong Kong on worries that the security law could allow mainland authorities to seize their wealth, bankers and other industry sources said.

That is quite damning for Hong Kong’s future on its own. So many things have rolled out of this and I remember Rolex watches being bought as collateral and then sold as well as if course the Bitcoin purchases. So there are more questions than answers before we even leave China.

The Equity Market

There is of course a Trump Tweet for this now the market is rallying.

Stock Market up BIG, DOW crosses 25,000. S&P 500 over 3000. States should open up ASAP. The Transition to Greatness has started, ahead of schedule. There will be ups and downs, but next year will be one of the best ever!

They are of course a bit thinner on the ground in declines but there is an issue here if we switch to the Hang Seng Index. This is from rthk on the 22nd of this month.

Hong Kong stocks dropped 5 percent in the noon session after Beijing said it plans to push through a national security law for the city, adding to tensions with the US and fuelling fears of fresh civil unrest.

The Hang Seng Index sank 5 percent, or 1,204 points, to 23,075, midway into the second session.

Although it slipped a little today it has not done much overall since then as it closed at 23,132. That is a relative loss at a time other markets have rallied. If we move on from the cheerleading of The Donald I note that the Nikkei 225 has over the past week gone from below the Hang Seng at circa 20500 to above it at this morning’s 21,916.

Exchange-Rates

Let me briefly hand you over to the Hong Kong Monetary Authority.

The Linked Exchange Rate System (LERS) has been implemented in Hong Kong since 17 October 1983. Through a rigorous, robust and transparent Currency Board system, the LERS ensures that the Hong Kong dollar exchange rate remains stable within a band of HK$7.75-7.85 to one US dollar.

The LERS is the cornerstone of Hong Kong’s monetary and financial stability.  It has weathered many economic cycles and has proved highly resilient in the face of regional and global financial crises over the years.

Oh dear “resilient” looks like being as applicable as it is to the banks! Anyway we have a currency peg in action which seems to be news to some. That means they follow US interest-rates too athough you can pick-up a bit more than 0.5% a year.

The Federal Open Market Committee of the US Fed announced last night to adjust downward the target range for the US federal funds rate by 100 basis points to 0-0.25%. In light of the Fed’s decision, the Hong Kong Monetary Authority (HKMA) also adjusted downward the Base Rate today. The Base Rate is set at 0.86% today according to a pre-set formula ( 16th of March)

Actually it has been edging higher and is now 1.11% so maybe a little heat is on.

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In terms of any response to pressure the HKMA would intervene first and at 3.6 trillion Hong Kong Dollars worth it has quite a war chest. Trouble is reserves never seem to be quite enough however large and in a panic interest-rate rises do not achieve much either. Well apart from applying a brake in the economy.

It could use the liquidity swaps system of the US Federal Reserve to get US Dollars and sell them but the lifespan of that would presumably be until The Donald spotted it.

Moving onto the Yuan and its offshore variant there has been a lot of talk about it but it has been remarkably stable considering the times ( that is a translation of the Chinese ave obviously been intervening) and is at 7.15 versus the US Dollar.

The Economy

This was in a bad way and things have got worse.

Hong Kong’s coronavirus-ravaged economy has suffered its worst decline on record, shrinking 8.9 per cent year on year in the first quarter and sparking an appeal from the city’s finance chief for unity to face the grim months ahead…….Hong Kong’s coronavirus-ravaged economy has suffered its worst decline on record, shrinking 8.9 per cent year on year in the first quarter and sparking an appeal from the city’s finance chief for unity to face the grim months ahead. ( South China Morning Post )

In case any central bankers are reading here is their priority.

Hong Kong SAR (China)’s Real Residential Property Price Index was reported at 189.610 2010=100 in Sep 2019. This records a decrease from the previous number of 194.800 2010=100 for Jun 2019 ( CEIC)

It will be lower now as I note this from the HKMA.

The Hong Kong Mortgage Corporation Limited (HKMC) announces that, the pilot scheme for fixed-rate mortgages will start receiving applications from 7 May (Thursday). In response to the change in market interest rates, mortgage interest rates under the pilot scheme are lowered, as compared to the levels previously announced in the 2020-21 Budget (Budget). The interest rates per annum for 10, 15 and 20 years of the Fixed-Rate Mortgage Pilot Scheme are as follows:

2.55%, 2.65% and 2.75% respectively in case you were wondering.

Comment

The situation is a bit like a dam which invariably looks perfectly secure until it bursts. Indeed there are some bouncing bombs in play.

TRUMP ADMN TO EXPEL CHINESE STUDENTS WITH TIES TO MILITARY SCHOOLS: NYT ( @FirstSquawk )

Financial markets are more likely to be troubled by this from Secretary Pompeo.

Today, I reported to Congress that Hong Kong is no longer autonomous from China, given facts on the ground. The United States stands with the people of Hong Kong.

This is the real question will they be able to operate freely? Next comes the issue of where will the business go? This begs lots of question as I have a friend who works there.

Looking at Hong Kong itself the currency peg looks vulnerable in spite of the large foreign exchange reserves. It so often turns out that Newt from the film Aliens was right.

It wont make any difference

The real ray of hope is that the Chinese may adapt their bill which lacks detail.

Harmful elements in the air
Symbols clashing everywhere
Reaps the fields of rice and reeds
While the population feeds
Junk floats on polluted water
An old custom to sell your daughter
Would you like number twenty three?
Leave your yens on the counter please
Ho-oh, ho-oh-oh-oh
Hong Kong Garden
Ho-oh, ho-oh-oh-oh
Hong Kong Garden ( Siouxsie and the Banshees )

As to the housing market is this how Nine Elms ( confession my part of London) finds some new buyers?