Hong Kong, one of the world’s leading financial hubs, is facing a severe cash crunch that has pushed the interbank lending rates to the highest levels in 23 years. The Hong Kong Interbank Offered Rate (Hibor), which measures the cost of borrowing Hong Kong dollars in the interbank market, has surged to over 10% for some tenors, reflecting the tight liquidity conditions in the city.
Hibor is the benchmark interest rate for the Hong Kong dollar, which is pegged to the US dollar within a narrow range of 7.75 to 7.85. The Hong Kong Monetary Authority (HKMA), the city’s de facto central bank, maintains the currency peg by adjusting the supply and demand of Hong Kong dollars in the market.
Hibor affects the borrowing costs of banks, businesses and households in Hong Kong, as well as the returns of savers and investors. A higher Hibor means that it is more expensive to borrow or lend Hong Kong dollars, which can have a negative impact on the economic activity and financial stability of the city.
What is causing the cash crunch in Hong Kong?
There are several factors that have contributed to the cash crunch in Hong Kong, including:
- The US Federal Reserve’s tapering of its bond-buying program, which has reduced the global liquidity and increased the demand for US dollars. This has put pressure on the Hong Kong dollar peg, as more Hong Kong dollars are needed to buy US dollars and maintain the exchange rate.
- The upcoming initial public offerings (IPOs) of several Chinese companies in Hong Kong, which have attracted huge amounts of capital from investors. According to some estimates, the IPOs of ByteDance, Didi Chuxing and JD Logistics could lock up as much as HK$1.5 trillion ($192 billion) of funds in the city, further draining the liquidity in the market.
- The seasonal demand for cash ahead of the Lunar New Year, which falls on February 1, 2023. Many businesses and individuals need cash to pay bonuses, salaries and gifts during the festive period, which increases the demand for Hong Kong dollars in the market.
What are the implications of the soaring Hibor rates?
The soaring Hibor rates have several implications for the Hong Kong economy and financial system, such as:
- Higher borrowing costs for banks, businesses and households, which could dampen the economic recovery and consumer spending in the city. The higher Hibor rates also increase the risk of defaults and bad loans, especially for the highly leveraged property sector, which accounts for about half of the bank lending in Hong Kong.
- Lower returns for savers and investors, who may see their interest income shrink or even turn negative. The higher Hibor rates also reduce the attractiveness of Hong Kong dollar assets, as the yield gap between Hong Kong and US dollar assets narrows or even reverses.
- Higher volatility and uncertainty in the market, which could trigger capital outflows and currency fluctuations. The higher Hibor rates also increase the likelihood of intervention by the HKMA, which may need to inject or withdraw liquidity from the market to defend the currency peg.
How long will the cash crunch last?
The cash crunch in Hong Kong is expected to ease after the Lunar New Year, as some of the factors that have caused the liquidity squeeze will subside. For instance, the IPO funds will be released back to the market after the listing of the companies, and the seasonal demand for cash will decline after the festive period.
However, some analysts warn that the cash crunch could persist or even worsen in the longer term, as the US Fed continues to tighten its monetary policy and raise its interest rates. This could increase the pressure on the Hong Kong dollar peg and the Hibor rates, as well as the divergence between the Hong Kong and US economies.
