Hongkongers are facing many economic uncertainties, with a trade war topping the list, but the city's diversified export destinations and support from mainland China will help reduce any negative impact, according to the CEO of the Hong Kong Monetary Authority (HKMA).
The city's de facto central bank was closely monitoring the development and impact of trade frictions after US President Donald Trump announced tariffs on goods from China, Canada and Mexico, said Eddie Yue Wai-man.
"In the event of a trade war [or] trade friction, it will have an impact on global economic inflation and even the supply chain," Yue said on Monday after meeting members of the Legislative Council. "No economy will benefit and no one will be the winner."
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The details of the tariff policies and retaliation approaches remained to be seen, but could slow the global economy and raise inflation in the US and even globally, Yue said. Beijing said on Sunday that it would challenge Trump's tariffs at the World Trade Organization and take countermeasures to safeguard its interests.
The US Federal Reserve's interest-rate decisions would be essential to Hong Kong, which has been in lockstep with the Fed's monetary policy since 1983 under its linked exchange rate system, Yue said.
The overall direction of the interest-rate cycle was down even though the magnitude of the cuts had yet to be seen and the pace was slower than expected, he added.
Amid high interest rates, Hongkongers should be careful about taking out loans and servicing mortgages, Yue said, adding that the HKMA would monitor the bad-loan situation.
The level of bad or doubtful loans, as a proportion of total lending by Hong Kong banks, was "similar" in the fourth quarter to the 1.99 per cent recorded in the third quarter, Yue said. The official fourth-quarter figure has not been released. The figure was 1.89 per cent in June, 1.5 per cent at the end of 2023, 1.4 per cent in 2022 and 0.88 per cent in 2021.
A man walks past a money-exchange shop decorated with different banknotes in Central on August 6, 2019Photo: AP alt=A man walks past a money-exchange shop decorated with different banknotes in Central on August 6, 2019Photo: AP>
The ratio was facing upwards pressure due to high rates, the unresolved problems of privately owned mainland developers and liquidity constraints among Hong Kong's smaller developers, Arthur Yuen Kwok-hang, HKMA's deputy CEO, said in the meeting.
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In addition, the latest default rate for the Special 100 Per Cent Loan Guarantee scheme, a lending programme to support small and medium-sized enterprises, rose to 13.5 per cent from more than 10 per cent, according to the HKMA.
While the city's economy and exports would take some hits from trade tensions, its diversified export destinations would mitigate the impact, Yue said.
The mainland's many economic stimulus measures to support domestic consumption would also benefit Hong Kong, he added.
Amid market uncertainties, the HKMA would manage the Exchange Fund, the city's financial war chest for defending the Hong Kong dollar's peg to the US dollar, in a "prudent and defensive" way, Yue said.
"The interest rate deceleration is not as fast as expected, stabilising the Exchange Fund's interest income from bonds," he said. "However, if interest rates rise due to tariffs, inflation, or the US fiscal situation, which will have an impact on bond prices, the HKMA will act in a prudent manner to ensure sufficient liquidity and defensive allocation."
This would mean investing in shorter-term bonds or holding more cash, Yue said.
Several lawmakers asked whether the HKMA would consider increasing the Exchange Fund's payment to the Hong Kong government's fiscal reserves to help with a budget deficit. Yue reiterated that such a move would require prudent thinking amid rapid changes in the external environment.
"We must carefully assess the potential impact on market confidence regarding the adequacy of foreign-exchange reserves to maintain monetary and financial stability," Yue said. "We must also consider perception risks, such as whether the market might speculate about future transfers."
This article originally appeared in the South China Morning Post (SCMP), the most authoritative voice reporting on China and Asia for more than a century. For more SCMP stories, please explore the SCMP app or visit the SCMP's Facebook and Twitter pages. Copyright © 2025 South China Morning Post Publishers Ltd. All rights reserved.
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