Hong Kong lowered its base interest rate to near record-low, following the second emergency cut in as many weeks by the US Federal Reserve to bolster the American economy from a looming recession, as the global coronavirus pandemic shows no sign of slowing. The cuts sent Asian stock markets into a collective slump.
The Hong Kong Monetary Authority (HKMA) reduced its rate by 64 basis points to 0.86 per cent, less than the US Fed’s full percentage point cut. The US central bank cut rates by a total of 1.5 percentage point in two emergency moves since March 4, well ahead of its regular open-market committee meeting scheduled for March 18.
The US Fed slashed its rate on Sunday to between 0 and 0.25 per cent, from a range of 1 to 1.25 per cent, matching its previous record-low.
The HKMA also cut the countercyclical capital buffer (CCyB) from 2 per cent to 1 per cent with immediate effect, which releases HK$500 billion (US$64 billion) into the economy, said HKMA chief executive Eddie Yue Wai-man. He added that the HKMA can cut the CCyB to zero if needed.
“The new coronavirus outbreak has led the global financial markets [into] a high level of correction, [pushing] the Hong Kong stock market along with overseas markets into big swings,” the HKMA’s chief executive Eddie Yue Wai-man said in a statement after the rate cut. “After the US Fed’s cut [two weeks ago], other central banks have also been reducing interest rates or introducing other measures to control the risks arising from the outbreak.”
“Hong Kong is falling into a recession as we see shop closures and job losses,” said Thomas Lam, head of valuation and advisory at International property consultant Knight Frank. “All these factors will hit consumer purchasing power, including home buying. These rate cuts could soften the blow to the property market.”
Asian stock markets fell across the region after the rate cuts, responding with the same collective slump as the first emergency move two weeks ago. From Seoul to Wellington, and Mumbai to Manila, stock indexes in every one of the region’s 20 stock markets. Hong Kong’s Hang Seng Index ended the day 4 per cent lower, while Shanghai’s Composite Index tumbled 3.4 per cent, and Shenzhen’s benchmark plunged 4.8 per cent in its biggest one-day decline since February 3.
“After underwhelming policy responses from the US government in the current limited window for effective action, the odds of a technical recession have risen considerably,” said Eli Lee, head of investment strategy at the Bank of Singapore. “The historic turmoil in equity markets last week, together with worrying signs of dysfunction in fixed income and credit markets despite the Fed expanding repo operations to US$1.5 trillion last week, has forced the Fed’s hand in deploying a bazooka approach.”
Asian stocks crashed 11 per cent last week, the most since the global financial crisis in 2008, contributing to some US$7.7 trillion erosion in market value globally.
The latest emergency act is set to stoke concerns about a global recession, with China’s industry and retail indicators hitting historic lows in February. Industrial output plunged by 13.5 per cent in January and February from last year, with retail sales falling 20.5 per cent. Fixed-asset investment, which measures investments in factories, shrank 24.5 per cent, while the jobless rate jumping to a record 6.2 per cent in February.
As new cases of Covid-19 infections taper off in mainland China, factories, workshops and various parts of the economy are slowly kicking back into gear, as workers emerge from a weeks-long lockdown to return to work. Thermal imaging from satellite photos show economic activity picking up in the Greater Bay Area in southern China, according analysis by MioTech.
Still, the pandemic has brought some of the world’s biggest economies to a near a standstill, with countries from Asia to Europe and the US tightening city and border controls to contain the virus. Globally, 162,684 people have caught the coronavirus, 51 per cent of the afflictions outside mainland China, while 6,446 people have died.
“The effects of the coronavirus will weigh on economic activity in the near term and pose risks to the economic outlook,” the US Fed said in an overnight statement. It would “maintain this target range until it is confident that the economy has weathered recent events.” Confirmed cases have soared to 2,794 in the US in the past two weeks, with 56 deaths.
The US Fed also resumed the quantitative easing measures that were first instituted during the 2008 global financial crisis, announcing that it would buy US$700 billion in Treasury and mortgage-backed securities to prevent market disruptions.
Hong Kong’s coronavirus infections rose to 148 at last count, with four deaths. The HKMA had earlier lowered its rate by 50 basis points on March 4 in lockstep with the US Fed’s first emergency rate cut since the 2008 global financial crisis.
Hong Kong’s de facto central bank trimmed its base rate three times in 2019 by a combined 75 basis points as the economy slipped into a technical recession in the third quarter.
HSBC, the largest of Hong Kong’s three currency-issuing banks, said it would maintain its best lending rate unchanged at 5 per cent, following the HKMA’s move.
The HKMA will hold a round of meetings with the city’s banks and small-and-medium enterprises on how the additional HK$500 billion can be used. Last October, the HKMA used its heft to persuade nine of Hong Kong’s largest lenders to pledge their support to the city’s SMEs, as months of anti-government protests had begun to sap consumption and retail sales.
“I call on the banking sector to provide full support to SME borrowers while complying with their own credit policies and risk management principles,” Hong Kong’s Financial Secretary Paul Chan Mo-po said in a statement. “This includes handling enterprises’ loan applications with a supportive, accommodating and flexible attitude at full speed, and providing the option of loan restructuring for those in need, so as to assist them in overcoming the challenges.”
The nine banks, including three of Hong Kong’s currency issuers HSBC, Standard Chartered Bank and Bank of China (Hong Kong), agreed to provide a range of measures to help SMEs, maintain their credit lines, and make good use of HK$300 billion released into the financial system.
With reporting by Yujing Liu and Zhang Shidong
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