Wednesday, January 18, 2012

Tightening liquidity

Recent months have seen a reasonable amount of commentary about tightening liquidity in Hong Kong's financial markets.  It's reasonably clear that monetary conditions have become tighter:

1. Three month HIBOR has risen from around 0.2% to around 0.4% over the last 12 months.  This feeds directly into mortgage costs - two of our mortgages have now been reset at rates fractionally over one percent;

2. We are seeing some evidence of banks competing for HKD deposits, especially term deposits;

3. higher capital requirements are having an effect although I did not find any information quantifying the effect.

However, the above is slightly surprising given that HKMA statistics show that while HKD deposits are lower than their October 2010 peak they have been steadily increasing from their Februaury 2011 low. Total deposits in all currencies have been rising.

Given that inflation remains well above even the best rates available for deposits, I was slightly puzzled by the fact that all the anecdotal evidence and the hard fact of the higher HIBOR rates point to tighter liquidity at a time when HKD deposits have been rising.

The answer would appear to be on the lending side of the ledger.  Statistics published by the HKMA show that since October 2010 total loans have grown faster than total deposits and the difference of approximately HKD436 billion is (possibly) large enough to be significant.

As an aside, the HKMA statistics also show that the total outstanding balance of residential mortgage loans continues to increase (although very slowly).  At least part of this can be attributed to people being unwilling to make early repayments on the very low cost mortgages which were taken out during the height of the mortgage wars (about 2008-2010).  I'm one of them - HIBOR will have to get a lot higehr before I start making early repayments on debt that is, on averge, still costing me less than 1% pa.

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