Hong Kong | Property awash in cash shielded from rates: HSBC

Don’t expect interest rates to spike anytime soon in Hong Kong, where abundant liquidity has fueled spectacular rallies in the stock and property markets.

That’s according to Hong Kong’s biggest lender HSBC Holdings Plc, which says a key measure – the aggregate balance maintained by commercial banks – would need to plunge by USD10 billion for local rates to show any substantial gains. An outflow of that magnitude isn’t likely to happen quickly barring a big market shock, said George Leung, an HSBC adviser for Asia-Pacific who’s among the bank’s senior management.

“Unless there’s some unforeseen political crisis, I don’t see a very substantial outflow of capital out of Hong Kong,” Leung said in an interview on Monday. “To get this amount out of Hong Kong’s banking system it may still take quite a bit of time.”

With Hong Kong’s monetary policy essentially dictated by the U.S. Federal Reserve because of the currency peg, the city’s de facto central bank has been warning that rising interest rates could wreak havoc on the world’s priciest property market. The Hong Kong Monetary Authority on Wednesday ratcheted up banks’ capital buffers to limit the risks posed by booms in property prices and credit. Leung is taking a more sanguine view on the implications of rising rates, saying that abundant liquidity means it will take time for the increases to have an impact.

Hong Kong’s enormous cash pile has in part helped drive the world’s least affordable housing market to stratospheric levels and shares to the highest in a decade. Home prices are more than double their 1997 levels, when the city’s housing bubble burst. The local Hang Seng Index rose for a 13th day on Thursday, extending its longest streak since the gauge was launched in 1969.

While the aggregate balance of interbank liquidity has more than halved from its 2015 peak, at HKD180 billion ($23 billion), it’s still more than a hundred-fold larger than what was typical before the dawn of U.S. quantitative easing in 2008. The aggregate balance shrank since 2015, mostly because the Hong Kong Monetary Authority sold extra debt, which was seen as a deliberate move to nudge rates higher.

Under the Linked Exchange Rate System, local monetary conditions have to eventually converge with the U.S. This could happen when the HKMA sucks up liquidity in order to defend the Hong Kong dollar’s HKD7.75-HKD7.85 band. The local currency has weakened 0.1 percent this year to HKD7.8244 as Hibor’s discount to the U.S. equivalent widened.

Another rate worth watching is the prime rate, which is set individually by banks and hasn’t been raised since 2006. That rate is the basis for a cap on Hibor-based mortgage rates, which made up 92 percent of new housing loans in November. The floating Hibor has started to run into its cap, creating pressure for banks to raise their prime rates.

There’s a higher chance for local banks to raise their prime rates in the first quarter, Alex Cheung, head of the institutional banking group at DBS Bank (Hong Kong) Ltd. said in November.

Even if local rates rise, it’s unlikely home prices will see a large fall amid a supply shortage, Leung added. It will take a rate increase of at least 200 basis points to see any material impact on the property market, and only three U.S. rate hikes totaling around 75 basis points are expected this year, he said. Justina Lee, Alfred Liu, Bloomberg