Hong Kong becomes world's must-watch market as easy money ends

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HONG KONG (BLOOMBERG) - For global investors trying to the gauge the fallout from surging interest rates and slowing economic growth, Hong Kong is quickly emerging as a must-watch market.

Perhaps nowhere else is as exposed to two of the biggest worries roiling global asset prices - the Federal Reserve's rapidly tightening monetary policy and China's sputtering economy.

While Hong Kong's US$466 billion (S$651 billion) foreign-reserves stockpile and plentiful interbank liquidity suggest little chance of an imminent crisis, signs of financial stress are building.

This week saw the city intervene to prop up its pegged currency for the first time since 2019. Its stock market has tumbled this year at one of the fastest rates globally. Home prices in the world's least affordable property market are falling and signs of capital flight are multiplying, after portfolio outflows last year topped US$100 billion for only the second time since Hong Kong's 1997 handover to China.

"There's a lot the city can do to stabilise the financial system when capital inevitably flows out," said Rujing Meng, who lectures on finance at the University of Hong Kong. "What's difficult to predict is how bad sentiment can get globally. Things could get very volatile and systems could break before people get used to quantitative tightening. Hong Kong can't be immune to that."

The city has for more than a decade ridden a wave of cheap money inflated by central bank stimulus. Its companies repatriated funds to meet their liquidity needs when the global credit squeeze took hold in 2008. China's economic boom attracted capital into the city as mainland firms rushed to sell new shares. An estimated US$130 billion flowed in after the Fed began quantitative easing in late 2008, according to the Hong Kong Monetary Authority.

Investors parked their cash in the city because of its relatively safe and easily convertible currency. The abundance of money meant that even when the Fed raised borrowing costs in the 2015-2018 cycle, local rates stayed relatively low. The aggregate balance - a measure of interbank money supply in Hong Kong - is about 70 times greater than it was before the global financial crisis.

The result of QE has been a property bubble, with residential prices rising 237 per cent from 2008 through a record in August last year, Centaline data show. About US$6.5 trillion was added to Hong Kong share values, allow...

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