Syndicated loans

Immediate recovery unlikely for Hong Kong’s syndicated loan market

The highest 3-month HIBOR rate in a decade sends syndicated loan volumes to an all-time low.

Hong Kong’s 3-month benchmark interbank loan interest rate (HIBOR) is trading close to its highest level since the 2008 financial crisis, putting pressure on an already sluggish syndicated loan market.

Loan volumes fell to a record low of $4.6 billion across 15 deals in the second quarter of the year –
a 67% decrease on the previous quarter. And there is no respite in sight, according to financial data provider Dealogic.

HIBOR peaked on July 5 at 2.65%, before dipping briefly to 2.2% later in the month. The rate has since risen again to top 2.29% on August 8.

US Fed policy shifts usually predicate similar changes in the HKMA-controlled HIBOR, thanks to the tightly linked US-Hong Kong exchange rate system.

The current situation defies this convention. The 3-month London benchmark interbank loan interest (LIBOR) has fallen steadily since January, while the 3-month HIBOR has risen.

“In Hong Kong, the pace of the convergence of local interest rates with US interest rates is influenced by domestic conditions,'' said HKMA chief executive Norman Chan after the Federal Open Market Committee meeting at the start of August.

“I expect that HIBOR will continue to be influenced by local supply and demand and may not immediately follow the move in LIBOR.”

The situation is compounded by looming social and political instability. City-wide demonstrations against a China-Hong Kong extradition treaty intensified in July, and the ongoing China-US trade war continues unabated.

US President Donald Trump’s administration plans for a new round of tariffs to take effect on September 1. A 10% fee will be charged on $300 billion worth of Chinese goods that had previously been spared additional taxation.

To be sure, Hong Kong is not the only Asian financial market to become a casualty of the trade war. Exports across the Asia Pacific region have abated “as demand by manufacturers in China for intermediate inputs has fallen,” according to a report prepared by credit rating agency Moody’s.

Regional loan volume declined as a whole. Still, Hong Kong has been particularly hard hit with a 30% volume decrease, four percentage points higher than the regional average.

In the past, a lower HIBOR rate has helped the Hong Kong loan market recover quickly from similar disruptions.

The Hong Kong Umbrella Movement in 2014, which included a 79-day occupation of the city’s financial district, sunk loan volume by 39% from the first to the second half of the year, according to Dealogic data.

At the time, a 3-month HIBOR of 1% brought loan volume back up to pre-protest levels within six months.

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