As the US Federal Reserve's new cycle of interest-rate hikes kicked off, market experts have warned of the growing risk of capital outflow from Hong Kong in the coming year. Edmond Tang / China Daily

Mainland lender optimistic, but warns of capital outflow from city amid rate hikes

With tourism and re-exports on the wane and prospects of a new cycle of interest-rate hikes driving fears of capital outflows, concern over the outlook for Hong Kong's economy has continued to mount.

But, things may not be as bad as imagined, and the city's economy is likely to register a "modest growth" of 2.5 percent in 2016, says Bank of China (Hong Kong).

According to the bank's forecast, the SAR's faltering tourism and re-exports could hardly pick up in the coming year, but improved domestic demand banking on a stable job market, a vital financial industry, an investment-rich construction sector and a property market adjusted at a moderate pace can be expected to shore up the local economy.

The lender estimated that Hong Kong's real gross domestic product in 2015 will be at 2.5 percent - slightly higher than the SAR government's latest economic growth forecast for this year, which hovers around 2.4 percent.

A possibly fresh bout of capital outflow to the US, matching the US Federal Reserve's (Fed) new cycle of interest-rate increases, presents a major source of risks for the Asian financial hub in the coming year, warned E Zhihuan, Hong Kong-based deputy general manager at Bank of China (Hong Kong).

The new cycle of interest-rate rises would inevitably put further pressure on Hong Kong - a "small-sized open market" that is vulnerable to overseas economic changes, she said.

But the rate-rise cycle, coming at a slower and moderate pace, would definitely not be the whole story of the local economy next year, said E, who expected two rounds of quarter-point rate increases by the US Fed in 2016.

Hong Kong's economy may stand a good chance of enjoying a temporary reprieve as bank rates may be slow to move upward, thanks to "ample liquidity" in the financial system, she added.

Her remarks echoed those of Financial Secretary John Tsang Chun-wah, who said in his weekly blog that it is hard to predict how the US rate hikes will affect Hong Kong, but the city's financial system is solid enough to overcome any volatile capital flow.

It is also in line with the latest report by the International Monetary Fund which said risks were manageable. "The trend of US interest rates is just one factor affecting the global economy," Tsang noted.

Tse Kwok-leung, Hong Kong-based head of policy and economic research at Bank of China (Hong Kong), said the bank is upbeat ... that the situation next year would be better as the risks arising from the US Fed's move, which was flagged by many as the biggest concern for the city's economy, are "manageable" and "foreseeable".

The local property market - one of the two pillars of the SAR's economy and a key beneficiary of low interest rates - would see a mild decline of not more than 10 percent next year although homes prices are already feeling the pinch, having slipped by almost 6 percent in the past three months.

The stock market would continue to see a spate of volatility next year, but would not fluctuate as much as it did in 2015.

Global banks, however, have struck a negative tone. Swiss bank UBS predicts that Hong Kong's growth next year could slow to just 1 percent - the lowest level since the 2008 global financial crisis, while Goldman Sachs forecasts that the city's economic growth in 2016 will come down to 1.6 percent, saying US rate hikes will be a drag on local real-estate prices and hit consumption power.

sophia@chinadailyhk.com

(HK Edition 12/23/2015 page8)