Stretched property valuations mean Hong Kong’s economy is vulnerable if interest rates rise faster than expected, the IMF said in its annual assessment of the Asian financial hub.
The IMF identified three main risks — rising interest rates and potential global market volatility, China-linked stress and a possible downturn in the property market.
With the US Federal Reserve tipped to raise interest rates next week for only the second time in a decade, the higher borrowing costs would automatically flow through to Hong Kong, which effectively imports US monetary policy because its currency is pegged to the greenback.
“A steeper-than-expected US rate cycle or tightening of global financial conditions may have a bigger-than-usual adverse impact against a backdrop of high household debt with floating-rate mortgages,” the IMF said in its report, the Article IV Consultation.
Hong Kong’s government moved suddenly last month to cool prices in the world’s least affordable property market, raising stamp duty for all except first-time local buyers.
The property market peaked in September last year, before global economic uncertainty and slowing demand from mainland buyers sent prices lower for a while. Since March, prices have inched back to near record levels.
“With stretched valuations, there is the risk of an accelerated price adjustment should interest rates rise faster than expected,” the report said. “Although the financial system would be resilient to such an adjustment, there is a risk to the real economy from an adverse spiral of negative wealth effects, lower collateral values, slower credit growth, and weaker household and corporate spending.”
The Washington-based IMF also flagged risks from market volatility linked to British and European banks, given Hong Kong’s role as a major base for global lenders, and highlighted the risk of exposure to China’s slowing economy.
Hong Kong’s economy has proved more resilient than many feared, shaking off a contraction at the start of the year as a steady employment market underpinned demand. Exports also improved along with the stabilization in regional trade.
The IMF expects the Hong Kong economy to grow by about 1.5 percent this year and 1.9 percent next year.
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