This almost fixed exchange rate of the Hong Kong dollar against the US dollar, introduced in 1983, enabled the territory to overcome the Asian financial crisis of 1997 and consolidated its status as a major global financial centre.

But it also means Hong Kong has little choice but to go along with the monetary policy of the US Federal Reserve, which just carried out its biggest rate hike in 22 years in an attempt to curb inflation. .

"The Covid outbreak in Hong Kong and mainland China is already hurting growth," said Lloyd Chan, economist at Oxford Economics.

"The last thing Hong Kong needs right now is an interest rate hike."

On Friday, the territory revised down its growth forecast for 2022, now expected between 1% and 2%, after a fall of 4% in the first quarter, much worse than expected.

After enjoying more than a decade of low interest rates, Hong Kong is now facing a backlash, the city's finance chief Paul Chan warned last week.

"While the economy has not yet fully recovered from the epidemic, we must be vigilant about the impact of rising interest rates (...) on the population and small and medium-sized businesses “, Mr. Chan wrote on his official website.

So far, Hong Kong banks have struggled to keep rates reserved for their best customers stable.

But analysts estimate that they will be taken by the throat within three to six months.

In a fruit and vegetable store in Hong Kong, May 13, 2022 ISAAC LAWRENCE AFP

"Interest rates could rise faster than in the past, given the accelerated pace the Fed is following and also because of a general change in the perception of risk around the world," Gary Ng told AFP. economist at Natixis.

Front line real estate

The first to suffer the shock will be the holders of mortgages linked to the Hong Kong interbank rate HIBOR, predicts Heron Lim, an economist at Moody's.

According to him, this will lead to lower property prices in 2022 and 2023, "especially if demand from mainland Chinese investors is weak".

Higher mortgage prices should also weigh on household portfolios, slow down their consumption and therefore delay the recovery in Hong Kong, whose economy slowed down in the first quarter due to draconian restrictions against Covid-19.

Small and medium-sized businesses are also promised “very hard times” if the rise in rates is accompanied by an epidemic rebound, fears Samuel Tse, economist at DBS Bank.

The Hong Kong currency can float within a range between 7.75 and 7.85 Hong Kong dollars per US dollar.

The exchange rate is currently at the lower end of this range, due to capital outflows.

Last week, the Hong Kong Monetary Authority (HKMA) spent 8.53 billion Hong Kong dollars (1.08 billion U.S. dollars) to support the local currency, its first intervention since 2019.

Some commentators have begun to question the merits of the dollar peg, citing pandemic-related pressures and tensions between China and the United States.

This stowage constitutes a “highly robust and transparent” system, defended the deputy head of the HKMA, Edmond Lau.

In the streets of Hong Kong, May 13, 2022 ISAAC LAWRENCE AFP / Archives

The four analysts interviewed by AFP agree in predicting that Hong Kong will maintain its peg to the dollar despite changes in the global economy.

"Even though foreign exchange reserves have fallen from 500 billion (US) dollars to around 460 billion, it is still a relatively high level which should be sufficient to defend the Hong Kong dollar," said Mr. Tse of DBS.

For Mr. Lim of Moody's, the current system is "very defensible" as long as Hong Kong remains an international gateway for the Chinese economy.

Nataxis' Ng, meanwhile, notes that no panic selling has so far affected the Hong Kong dollar, which he says bodes well for the peg's future.

"But in the medium or long term", he adds, referring to the divergences between the economies of China and the United States, "everything will depend on whether the advantages of this monetary stability still outweigh the costs" .

© 2022 AFP