Hong Kong overnight funding costs double in sign of cash squeeze

THE cost of borrowing overnight in Hong Kong jumped the most in at least 17 years, with analysts pointing to reasons including stress in the global financial system and quarter-end cash hoarding.

The overnight Hong Kong interbank offered rate, known as Hibor, surged 253 basis points to 4.14 per cent on Tuesday (Mar 21). That’s biggest gain since data compiled by Bloomberg that began in 2006. The one-month gauge increased by 51 basis points, the most since 2008.

The city’s stocks tumbled on Monday, led by banking giant HSBC Holdings, as investors weighed a collapse in the value of additional tier 1 bonds issued by lenders following the terms of the Credit Suisse Group’s rescue. HSBC shares closed 6.2 per cent lower, the biggest drop in nearly six months, with its newly issued AT1 bond dropping by more than 5 cents.

“Funding needs in Hong Kong dollar may have risen due to quarter-end flows” and also from a bank exposed significantly to AT1, said Ryan Lam, head of research at Shanghai Commercial Bank, without elaborating on which lender he was referring to. “As long as the redemption wave of AT1 continues, Hibor is likely to rise further.”

Concerns about the banking sector following the crisis at Credit Suisse and the slide in Hong Kong stocks may have caused speculation about equity-related outflows, which together with the quarter-end effect explains the tight liquidity situation, said Carie Li, global market strategist at DBS Bank.

The city’s leader John Lee, speaking on Tuesday before the surge in borrowing costs, said Hong Kong’s banking system is resilient and liquidity in the market is “very abundant.” Exposure of the local banking sector and the market to Credit Suisse are insignificant, the Hong Kong Monetary Authority (HKMA) said in a statement on Monday.

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The rate is being driven higher also because traders are unwinding long US dollar positions against the Hong Kong currency, said Ken Cheung, chief Asian foreign-exchange strategist at Mizuho Bank. The sharp shrinkage in Hong Kong’s interbank’s liquidity pool – measured by the so-called aggregate balance – could also be a reason behind wilder moves in Hibor, said Eddie Cheung, senior emerging market strategist at Credit Agricole.

A spokesperson from the HKMA said they couldn’t comment immediately on the spike in Hibor, when contacted by Bloomberg.

The gain in borrowing costs came on the eve of the US Federal Reserve’s rate decision. The HKMA rate moves in lockstep with the Fed’s rate because the Hong Kong dollar is pegged to the US currency.

Hong Kong stocks rose on Tuesday, in line with global shares. The Hang Seng Index gained 1 per cent. BLOOMBERG