HONG KONG — A deep slump in real estate prices is testing Hongkong’s resilience. The question is whether the financial hub’s main watchdog has done enough to protect the banking system from its overheated property market. The final results of this appraisal will resonate far beyond the former British colony.
Hong Kong has long been one of the world’s most expensive, cities in which to buy a home. Amazingly, that is still the case, even after property prices dropped more than 30 percent since 2021 following the Covid pandemic, a sharp increase in US interest rates, and escalating trade tensions between China and the United States.
The slump has scorched even astute investors in the property-obsessed city who have long sought their fortunes by borrowing to buy bricks and mortar. Now this once-lucrative strategy has soured, even in the commercial real estate (CRE) sector.
The gloomy situation invokes unpleasant comparisons with the much larger crisis in mainland China where nearly all major developers, including former giants like Country Garden and Evergrande, have defaulted or even vanished. Hong Kong narrowly escaped its own “Evergrande moment” in July when the blue-chip New World Development pulled off a $11.1 billion refinancing. Several smaller firms have defaulted, with more facing repayment and restructuring pressure.
Bankers are feeling the strain. Take Hang Seng Bank, a 63 percent-owned HSBC subsidiary which is traditionally one of the most conservative lenders in town. When CEO Diana Cesar took charge of the $29 billion lender in 2021 only 1.04 percent of its loans were classed as non-performing. That figure has since soared to 6.69 percent due to souring credits in its HK$123 billion ($15.8 billion) commercial real estate portfolio, more than two-thirds of which is classified as having a “significant increase in credit risk” or worse.
The city’s top financial watchdog has good reasons to squash talk of drastic intervention. It has spent much of the past decade and a half taking steps to protect Hong Kong’s banking sector from the property bubble.
When Norman Chan took charge of the HKMA in late 2009, he had repeatedly warned of risks from another asset-price bubble. Liquidity was pouring into Hong Kong as a result of the US Federal Reserve’s quantitative easing. As an open economy with a currency pegged to the greenback, the HKMA could not hike interest rates. Instead it forcefully tried to dampen demand for residential mortgages, which accounted for 36 percent of banks’ total loans.
