Covid and closed borders: Hong Kong has avoided inflation. But how long can this last?
- Experts warn that homebuyers and borrowers may have to shoulder bigger financial burden as interest rate increase predicted
- But Hong Kong protected from big rises in inflation as long as border restrictions with mainland China continue, they add
Hong Kong will continue to be shielded from the heat of rising inflation if its border with mainland China remains closed, economists have said as they predicted a slow increase in consumer prices of between 1.5 per cent and 1.8 per cent for June.
But experts also warned that homebuyers and borrowers were likely to shoulder a heavier financial burden on mortgage payments and loans as they forecast local banks would increase interest rates by a range of 0.125 per cent to 0.5 per cent by the end of this year.
Successive interest rate increases by the United States to tame rising inflation, which soared to 9.1 per cent in June, would spark the move.
Hong Kong is an anomaly in comparison with other economies hard hit by high inflation, including the United Kingdom, which notched up a record 9.1 per cent rise in May, Singapore at 5.6 per cent in May and South Korea at 6 per cent in June.
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In the first five months of 2022, Hong Kong’s overall consumer price index (CPI) – a measure of changes in the cost of goods and services bought by households – rose by 1.4 per cent compared with a year earlier.
“Hong Kong has managed to stave off high inflation because rents have contributed to about 37 per cent of CPI with food prices taking up about 22 per cent,” said economist Simon Lee Siu-po, an honorary fellow at the Asia-Pacific Institute of Business at Chinese University.
“But due to the lack of visitors caused by the Covid-19 pandemic and restrictions on international travel, rents have been falling due to the weakened property market, contributing to the slow inflation over the past year.”
Hong Kong’s overall CPI in May recorded a 1.2 per cent rise year on year, but the underlying rate edged up to 1.7 per cent after excluding the effects of government one-off relief measures. The government will release the figure for June on Thursday.
The cost of clothing and footwear increased by 5.6 per cent, while basic food prices rose by 4.9 per cent from 2021, with eating out and takeaway food going up by 3.5 per cent. On the other hand, the cost of electricity, gas and water in May fell 4.9 per cent, and housing prices also eased by 0.5 per cent.
Lee said he did not expect Hong Kong to be hit by high inflation in the near future as the city would still be affected by mainland China’s lockdown-weakened economy, and predicted CPI would at most edge up to 3 per cent over the next year.
Other economists agreed that falling rents had reined overall inflation despite rising inflationary pressure for food, utility and transport costs, putting June’s inflation in a range of 1.5 per cent to 1.8 per cent.
“June inflation will mildly go up to 1.5 per cent with food prices continuing to rise but this will be offset by the weakened rental prices,” said senior economist Gary Ng at the investment bank Natixis.
“But inflation may rise to nearly 2 per cent in the latter half of this year largely depending on whether rental prices will go up and the housing market will rebound, which could lead to rising inflation.”
Iris Pang, the chief economist for Greater China at financial services firm ING, said the June CPI rose by about 1.5 per cent to 1.8 per cent.
“The city’s inflation will be mild and slow. I don’t worry at all,” she said. “We still suffer from a lack of visitors so prices won’t suddenly jump up from rising demand.”
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Pang said for Hong Kong to combat inflation, the most important thing was to help people to climb the housing ladder so they did not need to pay high rents.
“If they can be homeowners who don’t need to pay rent, they don’t mind the rising price of food. After all, rents have made up a large portion of people’s income,” she said.
Both Pang and Ng said high inflation would not hit Hong Kong unless it reopened its borders with the mainland, which could stimulate the city’s property market.
“As long as we shut down our borders with the mainland, there will be no need to worry about inflation,” she said. “But low inflation is not a good thing, indicating that our economy is weak with low consumption.
They said the government could review the composition of CPI to give a true reflection of prices. Ng suggested adding the weight of property prices and a separate analysis of CPI in terms of housing prices and rents. Pang advised the government to increase the weight of private housing rents.
Sze Lai-shan, deputy director of the Society for Community Organisation (SoCO), said the rising cost of daily necessities such as food and clothes hit low-income residents hard.
“As food prices go up, some residents told us they do not have enough money to buy food and will skip a meal every day,” she said.
“They wait for the special discount period when shops are about to close at night and sell their products at lower prices. That’s when they can afford food.”
Sze urged the government to support needy citizens with more relief measures, such as more unemployment funds with looser requirements.
Many residents told the Post they felt the pinch of rising prices, especially for food.
Truck driver Philip Chan, 34, said the rising cost of food was most visible to him. “I used to eat in restaurants that offered set meals with prices at around HK$35 (US$4.45),” he said.
“But it’s tough to find such restaurants now. They set most meals at over HK$40 already.”
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An elderly resident named Sin said life was difficult, as she relied on social welfare and old-age allowance to buy daily necessities. “The price of everything has gone up, food and stuff. It’s tough to live now,” she said.
Sin, in her 70s, appreciated the recent HK$10,000 consumer voucher scheme. “The voucher allowed me to buy more food, and I think it’s a good policy to continue. Hopefully, the government can provide more subsidies for us elderly people.”
