Hong Kong Sets Fastest Growth Pace Since 2011, Shrugging Off Fed

(Bloomberg) -- Hong Kong's high-wire economy continued to defy gravity, putting aside fears of a tightening Fed to post its best quarter of growth in almost seven years.

Data Friday showed the Asian financial hub grew 4.7 percent from a year earlier in the first quarter, the highest reading since June 2011 and more than a percentage point above the highest economist estimate.

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 also buoying sentiment.

"Consumption was extremely strong and that may have been boosted by rising property prices," said Iris Pang, an economist at ING Groep NV in Hong Kong. "Property prices will continue to rise 5 to 10 percent for the rest of 2018, and that will continue to create a wealth effect."

There are some signs of strain in the city, however.

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.

Robust demand means house prices should hold up, said Eddie Cheung, an Asia currency strategist at Standard Chartered Plc in Hong Kong.

“Persistent supply shortage and strong pent-up demand mean any price correction should be orderly and modest,” he wrote in a note.

A key wild-card 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 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 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 think this is probably the peak for growth this year," said Chang Liu, China economist at Capital Economics Ltd. in London. "Strong global demand should keep exports growing at a healthy pace over the months ahead, but rising interest rates in Hong Kong are likely to weigh on the domestic economy."

--With assistance from Kevin Hamlin

To contact the reporters on this story: Enda Curran in Hong Kong at ecurran8@bloomberg.net, Eric Lam in Hong Kong at elam87@bloomberg.net, Alfred Liu in Hong Kong at aliu226@bloomberg.net.

To contact the editors responsible for this story: Jeffrey Black at jblack25@bloomberg.net, Malcolm Scott at mscott23@bloomberg.net, Fion Li