Hong Kong to face challenging second half as US-dollar linked currency climbs

HONG KONG – China’s move toward a managed floating exchange rate system with a depreciation bias in the short term suggests that the Hong Kong dollaar has become the strongest currency in the world because of its Linked Exchange Rate System with the US dollar, says ANZ Bank, which says Hong Kong’s competitiveness as an international trade and finance centre will be affected “somewhat negatively”.

“Business costs will rise further relative to those in Singapore and Shanghai, Hong Kong’s two main competitors,” ANZ says.
“However, while Hong Kong’s exchange rate is pegged to the USD, its domestic prices, as reflected by wages, have been flexible. The lack of price rigidities will allow Hong Kong to regain its competitiveness with time.
“As the US Fed is likely to hike its policy rate in the second half of 2015, Hong Kong’s over-valued property prices will face downward pressure. However, a sharp downward adjustment in Hong Kong’s property prices is not likely. This is because demand for housing continues to outstrip the supply, and the Fed’s interest rate hike will be a gradual process.”
ANZ says it does not think that the change in the RMB exchange rate regime will have any impact on Hong Kong’s Linked Exchange Rate System.

But the bank is revising downwards its full-year GDP forecast for Hong Kong, compared with the government’s forecast of 2-3%. Hong Kong’s GDP beat expectations to grow 2.8% y/y in Q2, up 0.4ppt from the previous quarter.  www.live.anz.com (ATI).