HSBC, StanChart Hike Hong Kong Prime Rates as Liquidity Shrinks

Hong Kong banks including HSBC Holdings Plc raised their main lending rates for the first time this year as liquidity shrinks in the financial hub.

(Bloomberg) — Hong Kong banks including HSBC Holdings Plc raised their main lending rates for the first time this year as liquidity shrinks in the financial hub. 

HSBC, the city’s biggest lender, increased its Hong Kong dollar prime rate by 12.5 basis points to 5.75% per annum, effective Friday. Standard Chartered Plc and Bank of China (Hong Kong) also announced they would raise their prime rates. 

The moves came hours after the Hong Kong Monetary Authority lifted its benchmark interest rate by 25 basis points, following the US Federal Reserve. 

The environment is turning tougher for local banks, which resisted boosting their lending rates after the past two HKMA hikes. Repeated interventions to protect the city’s currency peg with the greenback are draining liquidity from the financial system and forcing short-term interbank borrowing costs, or Hibor, higher. That’s increasing funding costs for lenders.

“The US Fed’s rate hike of 25 bps on May 3 could keep US short-term market rates elevated, fueling Hong Kong’s Hibor and driving banks to lift their prime rates to more than 6% later in 2023,” Bloomberg Intelligence analysts Francis Chan and Peter Lau wrote in a note Thursday. 

One-month Hibor has climbed to 3.63%, the highest in four months, and narrowing the discount to its US equivalent Libor to about 1.5% percentage points. 

The difference in yields has made shorting the Hong Kong dollar profitable, known as the carry trade. The result is the currency has traded near the weak end of its trading band against the greenback for much of this year, forcing the HKMA to step in every time it goes over the line. On Thursday alone, the HKMA spent HK$4.7 billion ($595 million) defending the peg.

The repeated interventions are lowering the aggregate balance, a measure of interbank liquidity, to HK$44.5 billion, its lowest level since 2008. The balance was 10 times that at HK$457 billion as recently as September 2021.

“With funds flowing out from the Hong Kong dollar system, the interest rate automatic adjustment mechanism will kick in, thereby driving the Hong Kong dollar interbank rates to gradually rise and track the US dollar interbank rates,” Eddie Yue, chief executive of the HKMA, said at a briefing Thursday. The speed and magnitude of the increase will be depend on the amount of dollars in the local funding market, Yue said.

Rising lending rates could add pressure on an economy that finally emerged from recession in the first quarter. Gross domestic product expanded 2.7% in the three months to March from a year earlier as the reopening of its borders revived spending. Prime rates in Hong Kong are used as a base for banks to quote interest rates on mortgage loans.

“Amid an uncertain global environment, rate expectations will remain uncertain,” said HSBC Hong Kong chief executive Luanne Lim in a release. The adjustments are appropriate “considering the macro-economic environment, Hibor trends as well as the impact on our economy,” Lim said.

Fed watchers expected this rate increase to be the central bank’s final hike for a while, as tighter lending conditions and signs of a slowing economy suggest inflation will cool in the months ahead.

Yue also said that Hong Kong banks have no business dealings or risk exposure linked to troubled banks in the US, and that the direct impact on Hong Kong’s financial system is “very small.”


–With assistance from Richard Frost.

(Adds statements from Standard Chartered and Bank of China (Hong Kong).)

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