Tuesday, March 6, 2018

Warnings of Financial Blow-Up in Hong Kong

Ambrose Evans-Pritchard reports:

Hong Kong's currency regime is coming under serious strain as the US Federal Reserve steps up the pace of monetary tightening, threatening to set off an unpredictable chain of events in the world's most over-stretched financial system.

The enclave's US dollar peg - usually rock solid - has suddenly become the focus of global markets after the currency fell last week to its lowest level since the current trading band was established in 2005. Analysts say the authorities may soon be compelled to defend the exchange rate, with escalating complications.

A policy shift to force up Hibor lending rates - and drain excess liquidity - risks causing a host of latent problems to crystallise, threatening the territory's hyper-valued property market and exposing hidden leverage in the Hong Kong dollar "carry trade".

Rob Subbaraman, chief Asia strategist for Nomura, said the offshore hub is flashing 54 separate early warning signals under the bank's predictive model of future financial blow-ups.

"This is higher than during the peak of the Asian crisis [1997-1998]," he said.

Consultants Demographia estimate that prices are 19.4 times median incomes, up from 18.1 last year, making it the "least affordable" city in the world. (Sydney is 12.9, and London 8.5). Prices have jumped fourfold since 2003 in real terms.

 -Robert Wenzel 

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