(Yicai Global) Feb. 6 -- There is no risk of a quick rate hike in China's Hong Kong Special Administrative Region and the market doesn't need to worry about any financial risks related to possible capital outflow, said chief executive of the Hong Kong Monetary Authority.
Interest rates in the world is dependent on the US inflation rate and Fed's following moves, said Norman Chan Tak-Lam at a Legislative Council panel on financial affairs of Hong Kong yesterday. More than HKD1 trillion (USD128 billion) can be cushioned in Hong Kong even with the outflow of funds to the US in the case of a rate hike, he added, playing down any financial risk.
The current high-level asset valuation is based on an optimistic expectation and the market will correct if the expectation comes to nothing, Chan emphasized.
The prevailing view in the market is that even if the US inflation is high, the Federal Reserve will still raise interest rates gradually, not rapidly, Chan suggested. Given the continuous improvement in the US economy, the Federal Reserve will have three or more rate hikes this year. The ongoing balance sheet reduction coupled with the impact of tax reform will make the capital in the market flow back to the US in an accelerated pace. However, even if the money goes out, more than HKD1 trillion can still be cushioned in Hong Kong, he said.
"With a large monetary base for cushioning, the interest rate in Hong Kong will gradually rise along with that in the US," said Chan. If the spread between the dollar and the Hong Kong dollar continues to widen and that the funds would be gradually converted into the dollar, Hong Kong Monetary Authority will sell the dollar to buy the Hong Kong dollar so that Hong Kong's monetary base will be reduced and interest rates will go up.