Hong Kong follows US Fed's 25 basis point rate cut, just in time for city's stalling economy and kickoff of Budweiser's mega IPO

Enoch Yiu enoch.yiu@scmp.com

Hong Kong's monetary authority cut its base lending rate for the second time this year in lockstep with the US Federal Reserve's widely expected move overnight, reducing the cost of money just as a slowing local economy teeters on the brink of a technical recession.

The city's de facto central bank reduced the base lending rate by 25 basis points to 2.25 per cent effective immediately, matching a similar cut by the US Fed. Commercial banks in the city are likely to keep their prime rate unchanged at between 5.125 per cent and 5.375 per cent.

"The interest rate cut will benefit the capital markets and economic activities in Hong Kong, " Norman Chan Tak-lam, chief executive of the Hong Kong Monetary Authority, said in a media briefing after the rate cut.

"The global economy is on a downward trend as a result of the trade war between China and the US. The local social unrest has hit hard tourism, retail and restaurant businesses. The HKMA and banks will work together with the government to help (small and medium enterprises) cope with the challenging time," he said, referring to earlier announced measures to ensure businesses have funds to stay afloat.

Banks may not immediately follow the rate cut, he said, adding the current interest rate level remains low, with a typical mortgage rate at around 2 per cent.

Chan also said the US Fed has a mixed view on the future interest rate trend as seven members expect more rate cuts, five expect a rate rise while five unchanged.

"The mixed view means the interest rate outlook is uncertain. Investors need to pay attention to risk management amid market volatility, " he said.

For short-term borrowers, such as those seeking margin financing to buy stocks, the rate cut lets them leverage at a cheaper cost, just as Budweiser Brewing Company APAC kicks off its road show to raise US$4.8 billion in an initial public offering, in the world's second-biggest fundraising this year.

"Thursday's rate cut comes at just the right time for Budweiser's mega IPO, reducing the cost for investors to subscribe for the new shares," said the Hong Kong Securities Association's Chairman Gordon Tsui Luen-on. "As the market is expecting another 50 basis points of rate cuts later this year, borrowing costs will come down, which will encourage more IPOs."

Hong Kong's monetary policy is conducted in lockstep with the US Fed to preserve the local currency's peg to the US dollar, in a currency board system that has been in place since 1983. Any increase or cut in US rate is matched in equal amount immediately in Hong Kong to maintain the Hong Kong dollar's stability.

The previous cycle of interest rate cuts that began with the 2008 Global Financial Crisis unleashed a torrent of cheap funds that fed Hong Kong's property bull market for a decade.

Since the end of the US Fed's quantitative easing in December 2015, the Hong Kong Monetary Authority (HKMA) has raised the base lending rate nine times, increasing the cost of money by 2.25 percentage points. The cycle of rising rates peaked in August when the HKMA made its first 25-basis point rate cut.

Norman Chan Tak-lam, Chief Executive of the HKMA and Honorary President of the TMA speaks during the Treasury Markets Summit 2019 at the Four Seasons Hotel in Central on 16 September 2019. Photo: Jonathan Wong alt=Norman Chan Tak-lam, Chief Executive of the HKMA and Honorary President of the TMA speaks during the Treasury Markets Summit 2019 at the Four Seasons Hotel in Central on 16 September 2019. Photo: Jonathan Wong

The rate cuts are a much-needed spur to prevent Hong Kong's economic growth from stalling into a technical recession in the third quarter, as it's been squeezed by a year-long US-China trade war and three months of street rallies that deterred visitors, crimped retail sales and caused property prices to plunge.

Fitch Ratings cut its credit rating for Hong Kong, while Moody's Investor Service downgraded its rating outlook for the city within 10 days of each other, raising the borrowing cost for the government and any company that wants to sell debt.

SCMP Graphics alt=SCMP Graphics

For the stock market, the HKMA's rate cut comes just after Budweiser dusted off the IPO it had shelved weeks earlier in the midst of protests that have threatened the city's reputation as an international financial centre. At US$4.8 billion, Budweiser's IPO is half its original size but still the biggest in Hong Kong this year.

The borrowing cost for subscribing for Budweiser's shares is cheaper. at between 2 and 3.3 per cent compared with 4 to 5 per cent in July when the IPO was first shelved, Tsui said.

Other IPOs would soon follow. Logistics real estate developer ESR Cayman said on Friday that it would revive its US$698.8 million IPO in Hong Kong, which it delayed in June due to prevailing "market conditions". Home Credit, a consumer finance lender that counts China as its biggest market, has begun speaking with institutional investors ahead of its US$1 billion listing in Hong Kong.

This flurry of IPOs may go some way toward helping Hong Kong Exchanges and Clearing Limited (HKEX) catch up with New York in the race for the crown as the world's largest IPO market.

Falling interest rates would also help cut the mortgages and loans that are tied to the Hong Kong interbank offer rate, or Hibor, which would help companies cope with the city's economic slowdown, stalling its descent into recession, Tsui said.

Norman Chan Tak-lam, who is due to retire on September 30 as the HKMA's second chief executive, will speak at a media briefing at 8.45am after the rate cut.

This article originally appeared in the South China Morning Post (SCMP), the most authoritative voice reporting on China and Asia for more than a century. For more SCMP stories, please explore the SCMP app or visit the SCMP's Facebook and Twitter pages. Copyright © 2019 South China Morning Post Publishers Ltd. All rights reserved.

Copyright (c) 2019. South China Morning Post Publishers Ltd. All rights reserved.