Hong Kong’s private residential rents shoot to 14-year high

The CPI for July is scheduled for release this week. Inflation as measured by the CPI is expected to advance 8.6%YoY (0.5% MoM), up from 5.6% in June, partly due to the low base last July. Component-wise, food prices are still rising. The food component of China’s CPI charged up 14.8% in July – a good indication since Hong Kong imports 90% of its food supply, mainly from the mainland.

Private residential rents averaged HK$20.1/sqft in June, the highest recorded since the HK$20.4/sqft peak in September 1997. Although recent financial market turbulence has created blips in transaction volumes and even prices, the impact on rents in July should be limited given its lagged nature. The fact that Hong Kong continues to import loose monetary policy from abroad, coupled with medium term weakness in the USD means inflationary pressure will remain in 3Q11.

On the growth front, exports will be the swing factor (>200% of GDP) in 2H11. Exports are expected to quicken to 11.9% from 9.2% in June, due to strong pent-up demand as a result of the disruptions to the global supply chain from Japan’s earthquake in March. Exports to Japan began to turn positive in June after posting two consecutive months of negative growth. Meanwhile, China also posted robust export figures in July and recorded the largest trade surplus since Jan09. Import growth will probably quicken to 13.2% from 11.5% in June, resulting in a trade deficit of USD37.9bn, versus USD 40.3bn in June. The tepid US recovery alongside and EU sovereign debt worries are expected to drag down exports over the medium term. Like 2Q, net exports are expected to contribute negatively to GDP growth in 3Q and 4Q.

Sluggishness in US/EU economies has existed for quite some time already, so unless fundamentals make an abrupt turn for the worse, a mild growth deceleration is expected in Hong Kong in 2H to reflect tight conditions on the mainland. We maintain our full-year GDP forecast of 5.0%.