(Bloomberg) — The economy is crashing like never before, yet Hong Kong’s interest rates are expected to stay relatively elevated. That’s bad news for pretty much everyone apart from those betting on prolonged strength in the city’s currency.
Liquidity tightness in Hong Kong, partly caused by central bank moves to drain cash from the interbank market several years ago, contrasts with U.S. moves to slash borrowing costs. The resulting gap in interest rates — near the widest since 1999 for the one-month tenor — makes selling the greenback to buy the Hong Kong dollar a profitable trade due to the city’s currency peg.
While the Hong Kong Monetary Authority is now adding funds when it intervenes to defend the peg at the strong end, the amounts are insufficient to do much to shift the gap. The spread widened last month even as the HKMA injected $2.7 billion.
“For the interest-rate gap to narrow significantly enough, Hong Kong needs to see strong capital inflows from overseas funds,” said Carie Li, an economist at OCBC Wing Hang Bank Ltd. in Hong Kong. “But investor confidence won’t return until the pandemic is over, and that won’t happen in the near term.”
The city’s economy shrank 8.9% in the first quarter from a year earlier, a government report showed Monday. That’s the worst drop in data going back to 1974, according to the Census and Statistics Department Hong Kong. It marks the third straight quarterly contraction for the city, which experienced widespread disruptions as anti-government protests broke out in the second half of 2019.
Elevated funding costs, which underpin things like mortgages and corporate lending, may make companies and households less willing to borrow, according to Eddie Cheung, an emerging-market strategist at Credit Agricole SA. The HKMA last lowered its benchmark rate in March by 64 basis points, less than the 1 percentage-point cut deployed by the U.S. Federal Reserve.
The distortions are a side effect of maintaining the currency peg. While the city has benefited from the stability the peg provides, the trade off is a loss of control over monetary policy. In the years after the global financial crisis, while Hong Kong’s economy was booming, ultra-low borrowing costs helped fuel a property bubble. Now, it faces the reverse, despite falling U.S. rates.
The one-month borrowing cost in the first quarter of 2011 — when the economy grew at a blistering 7.6% — never rose above 0.2%. It currently stands at 1.1%, versus about 0.3% for the U.S. equivalent.
Hong Kong dollar bears like Crescat Capital’s Kevin Smith say the currency peg is unsustainable due to the city’s diminishing role as an international banking haven. He’s holding on to his short-Hong Kong dollar positions despite the recent strength, betting it will depreciate all the way to the weak end of the band.
Questions have been raised about the durability of the peg since it was created in 1983 to stabilize confidence and outflows during uncertainty over the then-British colony’s future. The U.K. and Chinese governments agreed on the city’s return to mainland control the following year.
George Soros tried and failed to bet against the peg in 1998, while Bill Ackman’s wager on a dramatic strengthening in 2011 also proved fruitless.
The HKMA’s shrinking aggregate balance is partly responsible for the city’s tight liquidity conditions. The gauge of interbank cash supply is down 70% over the past two years, near the lowest since the aftermath of the global financial crisis. Most of that money was drained by the de-facto central bank to defend the currency peg as the Hong Kong dollar was repeatedly pushed to 7.85 per greenback, the weakest it can technically trade.
The HKMA may have to boost the aggregate balance to as high as HK$150 billion ($19 billion) in the second quarter for rates to shift lower, analysts have said. The balance is currently at HK$84.7 billion, and will increase to HK$94.7 billion after May 6.
The city will ensure its money and foreign-exchange markets operate smoothly, HKMA chief Eddie Yue said a statement last month.
Another sign of tight liquidity can be found in lenders’ balance sheets. The city’s banks have far less idle cash on hand after the amount of funds on loan soared to the highest since 2002 relative to deposits. The latest data shows their loan-to-deposit ratio was at 90% in February, compared to just under 70% in 2009. Local currency savings increased just 2.5% last year, the least in more than a decade.
To be sure, borrowing costs have fallen, just not as fast as those in the U.S. The one-month interbank rate fell to 0.86% Tuesday, compared with as high as 2.7% at the end of last year. The strength in the Hong Kong dollar has also eased, with the currency trading at the weakest in almost four weeks at 7.7558 per greenback Tuesday morning.
But for now, it looks like those betting on currency strength have time on their side, something that can’t be said for the city’s businesses facing a ravaged economy.
(Updates the penultimate paragraph with the Hong Kong dollar’s latest price and Tuesday’s Hibor.)
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OTTAWA – Canada’s unemployment rate held steady at 6.5 per cent last month as hiring remained weak across the economy.
Statistics Canada’s labour force survey on Friday said employment rose by a modest 15,000 jobs in October.
Business, building and support services saw the largest gain in employment.
Meanwhile, finance, insurance, real estate, rental and leasing experienced the largest decline.
Many economists see weakness in the job market continuing in the short term, before the Bank of Canada’s interest rate cuts spark a rebound in economic growth next year.
Despite ongoing softness in the labour market, however, strong wage growth has raged on in Canada. Average hourly wages in October grew 4.9 per cent from a year ago, reaching $35.76.
Friday’s report also shed some light on the financial health of households.
According to the agency, 28.8 per cent of Canadians aged 15 or older were living in a household that had difficulty meeting financial needs – like food and housing – in the previous four weeks.
That was down from 33.1 per cent in October 2023 and 35.5 per cent in October 2022, but still above the 20.4 per cent figure recorded in October 2020.
People living in a rented home were more likely to report difficulty meeting financial needs, with nearly four in 10 reporting that was the case.
That compares with just under a quarter of those living in an owned home by a household member.
Immigrants were also more likely to report facing financial strain last month, with about four out of 10 immigrants who landed in the last year doing so.
That compares with about three in 10 more established immigrants and one in four of people born in Canada.
This report by The Canadian Press was first published Nov. 8, 2024.
The Canadian Institute for Health Information says health-care spending in Canada is projected to reach a new high in 2024.
The annual report released Thursday says total health spending is expected to hit $372 billion, or $9,054 per Canadian.
CIHI’s national analysis predicts expenditures will rise by 5.7 per cent in 2024, compared to 4.5 per cent in 2023 and 1.7 per cent in 2022.
This year’s health spending is estimated to represent 12.4 per cent of Canada’s gross domestic product. Excluding two years of the pandemic, it would be the highest ratio in the country’s history.
While it’s not unusual for health expenditures to outpace economic growth, the report says this could be the case for the next several years due to Canada’s growing population and its aging demographic.
Canada’s per capita spending on health care in 2022 was among the highest in the world, but still less than countries such as the United States and Sweden.
The report notes that the Canadian dental and pharmacare plans could push health-care spending even further as more people who previously couldn’t afford these services start using them.
This report by The Canadian Press was first published Nov. 7, 2024.
Canadian Press health coverage receives support through a partnership with the Canadian Medical Association. CP is solely responsible for this content.
As Canadians wake up to news that Donald Trump will return to the White House, the president-elect’s protectionist stance is casting a spotlight on what effect his second term will have on Canada-U.S. economic ties.
Some Canadian business leaders have expressed worry over Trump’s promise to introduce a universal 10 per cent tariff on all American imports.
A Canadian Chamber of Commerce report released last month suggested those tariffs would shrink the Canadian economy, resulting in around $30 billion per year in economic costs.
More than 77 per cent of Canadian exports go to the U.S.
Canada’s manufacturing sector faces the biggest risk should Trump push forward on imposing broad tariffs, said Canadian Manufacturers and Exporters president and CEO Dennis Darby. He said the sector is the “most trade-exposed” within Canada.
“It’s in the U.S.’s best interest, it’s in our best interest, but most importantly for consumers across North America, that we’re able to trade goods, materials, ingredients, as we have under the trade agreements,” Darby said in an interview.
“It’s a more complex or complicated outcome than it would have been with the Democrats, but we’ve had to deal with this before and we’re going to do our best to deal with it again.”
American economists have also warned Trump’s plan could cause inflation and possibly a recession, which could have ripple effects in Canada.
It’s consumers who will ultimately feel the burden of any inflationary effect caused by broad tariffs, said Darby.
“A tariff tends to raise costs, and it ultimately raises prices, so that’s something that we have to be prepared for,” he said.
“It could tilt production mandates. A tariff makes goods more expensive, but on the same token, it also will make inputs for the U.S. more expensive.”
A report last month by TD economist Marc Ercolao said research shows a full-scale implementation of Trump’s tariff plan could lead to a near-five per cent reduction in Canadian export volumes to the U.S. by early-2027, relative to current baseline forecasts.
Retaliation by Canada would also increase costs for domestic producers, and push import volumes lower in the process.
“Slowing import activity mitigates some of the negative net trade impact on total GDP enough to avoid a technical recession, but still produces a period of extended stagnation through 2025 and 2026,” Ercolao said.
Since the Canada-United States-Mexico Agreement came into effect in 2020, trade between Canada and the U.S. has surged by 46 per cent, according to the Toronto Region Board of Trade.
With that deal is up for review in 2026, Canadian Chamber of Commerce president and CEO Candace Laing said the Canadian government “must collaborate effectively with the Trump administration to preserve and strengthen our bilateral economic partnership.”
“With an impressive $3.6 billion in daily trade, Canada and the United States are each other’s closest international partners. The secure and efficient flow of goods and people across our border … remains essential for the economies of both countries,” she said in a statement.
“By resisting tariffs and trade barriers that will only raise prices and hurt consumers in both countries, Canada and the United States can strengthen resilient cross-border supply chains that enhance our shared economic security.”
This report by The Canadian Press was first published Nov. 6, 2024.