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* Industries * Solutions * Why Us * Sustainability * Forms & Guides * Insights * redirection-test * IDEAL Redirect * ATM & Branch * Help & Support * You are in Corporate Banking * PERSONAL BANKING * DBS * POSB * WEALTH MANAGEMENT * DBS Treasures * DBS Treasures Private Client * DBS Private Bank * DBS VICKERS SECURITIES * DBS Vickers Online * INSTITUTIONAL BANKING * Corporate Banking * SME Banking * DBS GROUP * About DBS * Portraits of Purpose * You are in Corporate Banking PERSONAL BANKING DBS POSB WEALTH MANAGEMENT DBS Treasures DBS Treasures Private Client DBS Private Bank DBS VICKERS SECURITIES DBS Vickers Online INSTITUTIONAL BANKING Corporate Banking SME Banking DBS GROUP About DBS Portraits of Purpose * ATM & Branch * Help & Support * ATM & Branch * Help & Support * You are in Corporate Banking * PERSONAL BANKING * DBS * POSB * WEALTH MANAGEMENT * DBS Treasures * DBS Treasures Private Client * DBS Private Bank * DBS VICKERS SECURITIES * DBS Vickers Online * INSTITUTIONAL BANKING * Corporate Banking * SME Banking * DBS GROUP * About DBS * Portraits of Purpose * You are in Corporate Banking PERSONAL BANKING DBS POSB WEALTH MANAGEMENT DBS Treasures DBS Treasures Private Client DBS Private Bank DBS VICKERS SECURITIES DBS Vickers Online INSTITUTIONAL BANKING Corporate Banking SME Banking DBS GROUP About DBS Portraits of Purpose * ATM & Branch * Help & Support Industries Solutions Why Us Sustainability Forms & Guides Insights redirection-test * Popular Searches * DBS Ideal, * Financial Institutions, * Solutions, * Cash, * Digital Exchange * Login IDEAL Vickers Online iBanking Research Article Detail * Research * Economics and Strategy HK SAR: ZERO-COVID POLICY WITH RISING RATES -------------------------------------------------------------------------------- Hong Kong SAR economic outlook is clouded by both rising rates and renewed COVID outbreak. Group Research - Econs, Samuel Tse18 Jan 2022 * Re-opening of border will likely postpone to end-2Q Flight ban will further stress the supply chain * The shrinking labour force is alarming * Investment outlook is cloudy given rising rates and a weakening economy * The GDP growth forecast for 2022 is adjusted downward to 2.4% from 3.0% * There are upside risks to our 0.92% 1M HIBOR and 1.75% end-22 forecasts Have a question? Get in touch * Download PDF * See e-Publication Photo credit: AFP Photo The new year kicked off with a new round of lockdown. With the Zero-COVID policy at play, the Hong Kong authorities imposed bans on social activities ranging from in-restaurant dinning after 6pm to in-person schoolings. Also, flights from 8 countries are banned. Re-opening of border will likely postpone to end-2Q given it take times to reach herd immunity (with booster shots) and enforce the use of new Health Code System. As a result, GDP growth forecast for 2022 is adjusted downward to 2.4% from 3.0%. We have also laid out the potential downside risks to our forecasts if the border is re-opened in 3Q/4Q instead. Retail sales will take the hardest hit. Even without the Omicron outbreak, retail sales growth slowed to 7.1% YoY in Nov from 12.1% in Oct as impact of cash voucher dissipated. That of big-ticket items such as durable goods plunged to 1.2% from 30.0%. With the delay in border re-opening, 2022 retail sales growth projection is down from 15.0 to 10.0%. Afterall, tourist spending accounts for around 30% of Hong Kong’s total retail sales. On external front, flight ban and removal of aircrews quarantine exemption will stress the supply chain. Reportedly, one of the giant airlines’ cargo capacity will drop to around 20% of its pre-pandemic numbers in Jan, down from 71% in Nov due to removal of aircrew quarantine exemption. Logistics costs may surge by 40% within three weeks and CPI is expected to surge to 2.2% in 2022, up from the projected 1.5% of 2021. This is consistent with the widening spread between trade growth in value terms and volume terms. Also, cargo fell by 11.9% YoY in 3Q21 versus 6.1% advancement of nominal GDP (18% points differences). This is in stark contrast to previous recoveries. The slowdown in Mainland China’s export-led production will also dampen Hong Kong SAR’s re-exports. The recovering advanced economies are now regaining market share from Chinese factories (see “China 2022: The State asserts”). Meanwhile, China’s domestic demand is weakening due to property market correction and renewed COVID outbreak. These also point to softer import demand from Hong Kong SAR. Recovery in job market will likely pause. Although unemployment rate dropped drastically from 7.2% in Dec20-Feb21 to 4.1% in Sep-Nov21, the pace had started slowing down since 3Q. In our best case, it will only drop to 3.3% by end-2022, which is higher than the pre-social unrest level of 2.8%. The shrinking labour force is even more alarming. Typically, the workforce should expand during recovery as the rising salary should lure economically inactive person back to work. Instead, it recorded on year decreases since mid-2019. It fell further by 1.1% YoY in Sep-Nov21. This translated into a loss of 143,000 workforce in the past 1.5 years. This largely match with the net departure figure (departure – arrivals) through Hong Kong International Airport since Apr 2020 (197,000). Interest rates and investment Rising interest rate alongside a weakening economy will dampen investment sentiment. Gross Domestic Fixed Capital Formation already decelerated from 23.9% YoY in 2Q to 10.8% in 3Q. Given six US Fed Fund Rate hikes are likely in 2022 and 2023 (see “USD Rates: The Fed’s speed limit”), Hong Kong’s liquidity will be tightened. In response to the accelerating tapering, HKMA has issued HKD80bn of Exchange Fund Bills and Notes to extract liquidity in the banking system. Aggregate Balance (AB) dropped from HKD458bn to HKD368bn of late. This is in contrast to the 2013-14 tapering because commencement of Stock Connect jet up the AB. Although GBA Wealth Connect has commenced in Oct last year, capital inflow was limited amid subdued investment demand. Absence of giant IPOs since the regulatory crackdown of various sectors started in Jun notably depressed capital inflow through Southbound Stock Connect. M2 growth was a meagre 1.9% YoY in Nov YTD, compared to 6.1% of nominal GDP growth. The Aggregate Balance will drop to HKD200bn by end of this year and HKD50bn by 3Q23 when rate hike cycle ends. Against this backdrop, deposit is likely to grow slower than loan in 2022. 1M HIBOR is thereby expected to rose to 0.92% by end-22 and upside risk is warranted. Yet, Prime Rate will stay unchanged this year. Given the experience from last rate hike cycle, Prime rate only rose by 0.125% when the Fed target rate hit 2.50%. To encounter such headwinds, timely and targeted stimulus such as cash vouchers are needed in the first half of 2022. As the fiscal reserve already fell by 28.8% to HKD862bn from its peak in 2019, the government will have to consider more bond issuance. In fact, it already surged to 1.2% of GDP in FY21/22 after 15 years long of fiscal neutrality. Over the weekend, the government proposed HKD3.57bn subsidies to support the retail sector heavy affected by the lockdown imposed lately, which accounts to 1.1% of total stimulus in the past two years. We expect more to come. There is upshot in government bond yields as fiscal spending may return alongside tightening liquidity condition. In fact, the spread between Hong Kong and US 10Y govies yields have narrowed to around 20-30bps lately. Compare to the last rate hike cycle, the spread could be widened to -120bps. Going forward, the spread will be largely neturalized and we think there is upside risk on our end-22 10Y HKD govies forecast of 1.75%. Yield of shorter tenors will rise even more aggressively as structural flattening will continue. Property market We expect stronger selling pressure ahead on residential properties, particularly in the first half of the year due to absence of investors from Mainland China. Prices on the secondary market has already fallen by 2.8% since the peak in September due to government’s plans to increase land supply. Purchasing power of residents are likely to retreat after a 21-month long bull market. There is also negative spillover from the recessed stock market onto the property sector. Business owners may also liquidate their properties in view of business difficulties. In fact, developers have slowed down the weekend sales. Yet, we do not see the price will drop significantly given the lingering land demand-supply imbalance. Land supply for the next 4 years stays at 94,000. Private properties completed also dropped by 30% in Nov YTD over a year earlier. Leveraging indicators such as loan-to-value ratio stayed low at 54.6 in Nov21, compared to historical high of 68.9 in 2022, also suggested the risk of property market is largely manageable. We think property prices will stay flat this year. To read the full report, click here to Download the PDF. SAMUEL TSE 謝家曦 ECONOMIST - CHINA & HONG KONG 經濟學家 - 中國及香港 samueltse@dbs.com Subscribe here to receive our economics & macro strategy materials. To unsubscribe, please click here. Read more IN THIS ARTICLE Load more TOPIC E & S Focus GENERAL DISCLOSURE/ DISCLAIMER (For Macroeconomics, Currencies, Interest Rates) The information herein is published by DBS Bank Ltd and/or DBS Bank (Hong Kong) Limited (each and/or collectively, the “Company”). This report is intended for “Accredited Investors” and “Institutional Investors” (defined under the Financial Advisers Act and Securities and Futures Act of Singapore, and their subsidiary legislation), as well as “Professional Investors” (defined under the Securities and Futures Ordinance of Hong Kong) only. It is based on information obtained from sources believed to be reliable, but the Company does not make any representation or warranty, express or implied, as to its accuracy, completeness, timeliness or correctness for any particular purpose. Opinions expressed are subject to change without notice. This research is prepared for general circulation. Any recommendation contained herein does not have regard to the specific investment objectives, financial situation and the particular needs of any specific addressee. The information herein is published for the information of addressees only and is not to be taken in substitution for the exercise of judgement by addressees, who should obtain separate legal or financial advice. The Company, or any of its related companies or any individuals connected with the group accepts no liability for any direct, special, indirect, consequential, incidental damages or any other loss or damages of any kind arising from any use of the information herein (including any error, omission or misstatement herein, negligent or otherwise) or further communication thereof, even if the Company or any other person has been advised of the possibility thereof. The information herein is not to be construed as an offer or a solicitation of an offer to buy or sell any securities, futures, options or other financial instruments or to provide any investment advice or services. 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This report is distributed in Singapore by DBS Bank Ltd (Company Regn. No. 196800306E) which is Exempt Financial Advisers as defined in the Financial Advisers Act and regulated by the Monetary Authority of Singapore. DBS Bank Ltd may distribute reports produced by its respective foreign entities, affiliates or other foreign research houses pursuant to an arrangement under Regulation 32C of the Financial Advisers Regulations. Singapore recipients should contact DBS Bank Ltd at 65-6878-8888 for matters arising from, or in connection with the report. DBS Bank Ltd., 12 Marina Boulevard, Marina Bay Financial Centre Tower 3, Singapore 018982. Tel: 65-6878-8888. Company Registration No. 196800306E. DBS Bank Ltd., Hong Kong Branch, a company incorporated in Singapore with limited liability. 18th Floor, The Center, 99 Queen’s Road Central, Central, Hong Kong SAR. DBS Bank (Hong Kong) Limited, a company incorporated in Hong Kong with limited liability. 13th Floor One Island East, 18 Westlands Road, Quarry Bay, Hong Kong SAR Virtual currencies are highly speculative digital "virtual commodities", and are not currencies. It is not a financial product approved by the Taiwan Financial Supervisory Commission, and the safeguards of the existing investor protection regime does not apply. The prices of virtual currencies may fluctuate greatly, and the investment risk is high. Before engaging in such transactions, the investor should carefully assess the risks, and seek its own independent advice. RELATED INSIGHTS * Asia Rates: Bank of Korea could pivot before the Fed 1 Nov 2022 * USD Rates: What is an appropriate long-term terminal rate? 1 Nov 2022 * HKSAR: Sagging fundamentals and asset prices 1 Nov 2022 Have a question? Get in touch * Download PDF * See e-Publication * Print RELATED INSIGHTS * Asia Rates: Bank of Korea could pivot before the Fed 1 Nov 2022 * USD Rates: What is an appropriate long-term terminal rate? 1 Nov 2022 * HKSAR: Sagging fundamentals and asset prices 1 Nov 2022 DBS CORPORATE * Solutions * Insights * Research * Our Network * Sitemap * Rate this site DBS GROUP * About DBS * Investor Relations NEED HELP? * DBS BusinessCare * +65 6222 2200 (Overseas) * 1800 222 2200 (in Singapore) * Mon to Fri (exclude PH) * 8.30am to 8.30pm * * Contact us MARKETS Singapore * Singapore * Hong Kong * India * Indonesia * Mainland China * Taiwan * Terms & Conditions| * Privacy Policy| * Fair Dealing Commitment| * Compliance with Tax Requirements| * Vulnerability Disclosure Policy| * ©2022 DBS Bank Ltd | Co.Reg. No. 196800306E| * * * * You need to enable JavaScript to run this app. RATE THIS SITE × How would you rate your overall experience on this site? What areas need improvement? 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