Hong Kong Monetary Authority Warns of High Risk from Interest Rate Hikes

I have been saying here that political authorities CANNOT deny the existence of bubbles anymore so they resort to:

I recognize the problem of addiction but a withdrawal syndrome would even be more cataclysmic.

Well, Hong Kong’s monetary board sees their economy as acutely dependent on the sustenance of bubbles and thus fears of interest rate increases

 

From the Dailymail.com.uk (bold mine)

Hong Kong's de facto central bank warned on Tuesday that the city's lenders might face "very high" risks from rising interest rates, which will threaten to drain liquidity at a time banks have heavy loan commitments.

Arthur Yuen, deputy chief executive of the Hong Kong Monetary Authority (HKMA), told the Hong Kong Institute of Bankers' annual conference that the U.S. Federal Reserve's decision to end its asset-purchase programme could create "liquidity risks" for Hong Kong banks.

The Hong Kong dollar is pegged to the U.S. dollar, so Hong Kong's domestic interest rates should rise in line with American ones. Still, economists have warned that rising U.S. rates could suck funds out of emerging markets, depressing asset prices in Asia.

Higher interest rates and possible outflows would add stress to the loan books of Hong Kong banks, which some analysts fear are already too exposed to borrowers in China, where non-performing loans have been increasing. In April, the HKMA said that Hong Kong bank lending to mainland-related customers rose 30 percent in 2013 to HK$2.276 trillion.

On Tuesday, Yuen said: "With these uncertainties in the interest rate cycle, we do think that the liquidity risk associated with banks in Hong Kong is still at a very high level - and with interest rates likely to reverse back to a more normal level, credit risk will also be a factor we need to look at."

A "landscape of uncertainties of liquidity and credit risk arising from interest rate cycle" has emerged at the same time as the Hong Kong banking industry has experienced near-historic levels of credit growth, said Yuen.

If you haven’t noticed the frequency of alarmism on “bubbles” from international political institutions have been intensifying. It's now almost on a weekly basis!

The BIS, IMF, OECD, RBA, ADB even the US Fed’s chairwoman Janet Yellen or even the Philippine BSP chief has expressed such concerns. Although their worries have been aired in different forms, which has mostly been described as overvaluations, complacency or low volatility or high risks from variable activities (e.g. geopolitics). 

Yet most of what these authorities caution about have been symptoms of bubbles.

Hong Kong’s markets should hardly be affected by interest rate increases IF their economy has been sound. The problem is it isn’t. Like everywhere else, Hong Kong’s economy has been subsidized by zero bound rates that has spawned bubbles in asset markets.

Zero bound rates has allowed marginal unviable projects, that would have NOT existed under normal conditions, to exist. In short, zero bound has democratized credit activities which has spread to include a vast number of subprime or less credit worthy borrowers.

And because subprime borrowers have been DEPENDENT on zero bound, an increase in interest rates will expose on such financial vulnerability. 

And when credit concerns become an issue on a wider scale (or affects many firms), this may cause systemic liquidity to ebb as borrowers delay payments or if they default, while lenders suffer balance sheet and capital losses. 

So the HKMA problem has been one of credit risk, where raising rates will undermine marginal subprime borrowers that causes a liquidity contraction that risks a spillover to the other parts of the economy.

Hong Kong even has a parking lot bubble.  Asset bubbles have even morphed into populist anti-free market political sentiment leading to public demand for government interventions.

Interest rate don’t need to rise in order to expose on such problems as I previously explained. 

The HKMA has already expressed concerns over the deteriorating quality of debt by corporate borrowers about a year back. That’s even when interest rates have remained flat since 2009 as shown above.

NPLs have been rising especially for loans to mainland Chinese companies as noted in the news above. These are examples of subprime or high risks credit activities that has been supported by zero bound that are now jeopardized by current unsustainable debt levels.

But the chicken eventually comes home to roost. Eventually bubbles implode because of the sheer unsustainable weight from overleverage or from interest rate increases or a combo of both.

Such is an example of the natural limits of zero bound regime or even from debt acquisition.

As the great Austrian economist Ludwig von Mises warned decades back, (bold mine)

But the boom cannot continue indefinitely. There are two alternatives. Either the banks continue the credit expansion without restriction and thus cause constantly mounting price increases and an ever-growing orgy of speculation, which, as in all other cases of unlimited inflation, ends in a “crack-up boom” and in a collapse of the money and credit system. Or the banks stop before this point is reached, voluntarily renounce further credit expansion and thus bring about the crisis. The depression follows in both instances.

HKMA's warnings are simply about the reluctance to stop "near-historic levels of credit growth". But eventually the markets will bring to limits these financial abuse. 

Yet all these resounding warnings from various international political authorities are just writings on the wall.