(Bloomberg) -- Hong Kong’s economy continues to defy gravity, for now.
The world’s least-affordable property prices continue to hold up, tourism and shopping have rebounded as China’s economy hums along, and a bustling stock market that’s set to boast one of the world’s-biggest stock offerings this year is buoying sentiment.
Data Friday is expected to show the Asian financial hub grew 3.4 percent from a year earlier in the first quarter. But that may be as good as it gets.
The gradual tightening of policy by the U.S. Federal Reserve is starting to bite, with the Hong Kong dollar peg meaning the Chinese region imports U.S. monetary policy. Meantime, a looming trade war between China and the U.S. threatens to dim the outlook further.
“From a macro perspective the Hong Kong economy is doing pretty well,” said Dong Chen, senior Asia economist with Pictet Wealth Management in Hong Kong. “Last year was extremely strong, of course on the background of a global synchronized expansion. This year we think it will moderate.”
Chen forecasts 3.2 to 3.3 percent growth for the first quarter, with potential to surprise higher if China’s economy can continue to outperform, boosting tourist spending in the city.
A key wildcard for Hong Kong’s economic health is the city’s interest rates, which had long been stuck at rock-bottom levels thanks to a weak currency and ample liquidity. Now, there are signs of stress.
The Hong Kong Monetary Authority was forced to buy up more than HK$50 billion of local dollars since the currency hit the weak end of its trading band for the first time since 2005 in mid-April, triggering a spike in the cost of lending between banks. Hong Kong’s aggregate balance of liquidity has dropped to around HK$128 billion.
As the HKMA has to follow U.S. Fed rate hikes, interest rates are “certainly on an up cycle,” says Chi Lo, senior economist with BNP Paribas (PA:BNPP) Asset Management.
The HKMA’s intervention will help raise the key Hong Kong Interbank Offer Rate, or Hibor, by reducing interbank liquidity -- narrowing the gap on other rates such as Libor and reducing the appeal of interest rate arbitrage as investors sold Hong Kong dollars for other higher-yielding currencies, Lo said. The authority has plenty of room to maneuver with $434 billion in foreign reserves, so the peg remains safe, he said.
China Trade
There are other worries, too. Ongoing trade tensions between the U.S. and China would have a direct impact, given the role of Hong Kong’s vast container ports as a key trading post.
"We should never look down the risk of a U.S.-China trade war," said Raymond Yeung, an economist at Australia & New Zealand Banking Group Ltd. "If the U.S. truly targets China-made gadgets, Hong Kong’s trade will be hit."
