Hong Kong’s economy can’t hold on for much longer.
For one thing, the territory is in the midst of two large bubbles. One is a credit bubble, similar to the one in China. Since 2008, the ratio of private non-financial credit to GDP has surged to 281% in Hong Kong.
The other is Hong Kong’s infamous property bubble. Since 2008, property prices have risen 105%. Prices peaked in August of last year, and have been declining since — a correction of 14% that has put the property market in “free fall” and contributed to a growth slowdown — but remain higher than they were in 1997, when the last bubble burst.
And according to a new research report from Nomura, which referred to Hong Kong as Asia’s imminent “flashpoint,” the territory is currently stuck “between a rock and a hard place.” The rock, in this case, is inevitable US rate hikes, and the hard place is China’s ebbing economy.
On the one hand, China’s huge growth slowdown is greatly affecting Hong Kong’s own growth, as the territory’s economy is tightly linked to the mainland. The territory is almost certainly on the path to a recession, even as interest rates remain at or near zero.
And on the other side of the world, rate hikes from the US Federal Reserve would likely lead to a spike in Hong Kong’s interest rates as well, because Hong Kong’s currency is pegged to the dollar. Increased capital outflows would also lead to higher rates. According to the Nomura note, higher interest rates might be able to deflate the bubbles because people would take out fewer loans and mortgages — but it would risk exacerbating the already-frightening growth slowdown.
It’s a lose-lose situation.