Worry over slower growth in China triggered broad selling in the Hong Kong stock market yesterday. The Hang Seng Index fell below the 20-day moving average of 25,693 points for the first time since April 25, closing 310 or 1.2 percent lower, at 25,565.
China's May money supply growth came in significantly below expectations at 9.76 percent, down from 10.4 percent in April. Total social financing declined to 1.06 trillion yuan (HK$1.216 trillion) from 1.394 trillion yuan. Liquidity conditions looked tight as tougher financial regulations resulted in higher borrowing costs and more difficulty in obtaining credit. Smaller banks are said to be under pressure to raise lending rates.
The Hong Kong Monetary Authority raised its base rate by 25 basis points to 1.5 percent, following the US Federal Reserve's rate hike on Wednesday. The US dollar one-month LIBOR of 1.17 percent is about 0.78 percent over the SAR's one-month HIBOR of 0.39 percent, the largest gap since November 2008. The big differential will keep interest rate arbitration, which weighed on the Hong Kong dollar's weakness.
But if you try to covert the HKD three-month HIBOR (0.57 percent) into a fixed rate using swap, the fixed rate for one and two years are 0.97 and 1.18 percent only. It seems that market is not expecting the HKD interest rate to go up much in coming years.
If you want to lock into a fixed rate for a 10-year loan, the fixed rate is just 1.9 percent. Actually, after the Fed's rate hike, the US 10-year treasury yield fell from 2.21 to 2.14 percent, though the shorter term two-year yield stayed higher at 1.35 percent.
Therefore, even the US Fed may start to trim its balance sheet, but the pace will be very slow and magnitude is not big, while ample liquidity in Hong Kong will remain.
The HSI may test the 50-day moving average (currently near 25,000 points), but the correction won't be deep.
Dr Check and/or The Standard bear no responsibility for any decision made based on this column.