International | May 31 2006
By Chris Shaw (Tokyo)
Falling global liquidity has been cited as one of the reasons behind the current correction in equity markets, in part because markets are regarded as leading indicators of the future outlook for the economy around which the market is based and lower liquidity puts pressure on economic growth.
Hong Kong is no exception, as this month the Hang Seng Index has fallen as much as 1,000 points as it corrects along with other markets as the global growth outlook becomes more clouded, this despite its own growth outlook remaining strong.
According to DBS, one implication of the fall in the Hong Kong equities market has been upward pressure on interest rates, as during the correction interbank rates have increased by as much as 20 basis points.
DBS suggests such upward pressure on rates is likely to continue thanks to a variety of factors, including the likelihood of further interest rate increases in China as attempts to slow the pace of growth, and investment growth in particular, continue. It suggests higher rates in China are likely to be accompanied by selling in China-related assets, which would see further pressure on interbank rates.
Additionally, the Hong Kong banking sector has seen liquidity levels fall as following the initial public offerings of Chinese companies on the Hong Kong equities market the proceeds are being remitted back to China, which pulls money out of Hong Kong’s banking system.
DBS also notes the futures market is pricing in a further rate increase in Hong Kong before the end of the year, an outcome it suggests is likely given rates in the US have risen 0.75% this year against 0.25% in Hong Kong, putting pressure on the exchange rate thanks to Hong Kong’s peg against the US dollar.
On the plus side, DBS suggests the economy is strong enough to withstand a further increase in official interest rates, as first quarter growth figures attest. The economy surprised on the upside, recording growth of 8.2% year-on-year, up from 7.5% in the December quarter and above the market consensus of a 7.2% increase.
It notes the economic strength remains broad-based, a view shared by Lehman Brothers who pointed out the strength in exports has been matched by higher levels of consumption and capital spending and a strong labour market.
While growth in the export of services was very strong in the March quarter, increasing by more than 14%, Citigroup suggests this rate of increase is not sustainable for the full year. Despite this, it has revised up its growth forecast for 2006 to 5.7% from 5% previously.
HSBC is also taking an optimistic view on the economic outlook, noting its estimate of 5% growth is likely to prove conservative. This is below the consensus estimate of around 6% growth for the full year, which again is above the government’s current estimate of 4-5% growth, a figure it intends to re-examine after the June quarter.
