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Analysts at ING ascertain financial risk while closely observing Hong Kong protests and market performance since the beginning of the violence.

Key quotes

Ongoing violent incidents in Hong Kong mean that  market participants are looking for signs of financial risk. Interest rates, which have risen  since the protests began, are a good place to start.

We  benchmark the Hong Kong Interbank Offered Rate (HIBOR) to another economy’s interbank rate in order to strip  out the possibility that  any rise in HIBOR has been driven by global events. The usual benchmark is USD London Interbank Offered Rate (LIBOR), the US’s interbank interest rate.

The most common approach is to use the three-month  HIBOR-LIBOR spread as an indicator of liquidity tightness in Hong Kong. HKD forward points, which drive off these spreads, are basically another way of looking at the same thing. Not surprisingly, they have also pushed higher.  

The HIBOR-LIBOR spread was around 0 percentage points to -1 percentage point  for most of the time since 2016. But this  has moved from negative to positive since mid-June, i.e., Hong Kong dollar interest rates have gone up, which matches the date that violence began in Hong Kong.  

On 20  November, the HIBOR-LIBOR spread was around +0.6  percentage points. However, this is not very high compared to previous episodes of financial stress in Hong Kong.

The last time we saw a large positive HIBOR-LIBOR spread was back in 1997 during the Asian Financial Crisis.  

Readers may wonder why there was no spike in the HIBOR-LIBOR spread during the Global Financial Crisis in 2008-2009. But that was because the risk originated from the US, and spreads were negative. US liquidity strains were higher than those  in Hong Kong.

Returning to the high positive spread back in 1997, this rose as high as 10 percentage points on 27  October 1997.