Hong Kong:PMI falls again in April

Hong Kong’s PMI has remained below the expansion/contraction threshold of 50 since March 2015 as a strong HKD and weaker China growth have hurt both tourism and retail sales. The property market, constrained by investor uncertainty over the path of the Fed’s rate hike cycle, has tapered off from a peak in September 2015. While the PMI rose to 46.4 in February from 46.1 in January, it fell back to 45.5 in March and again to 45.3 in April. Given its high correlation with real GDP growth, the April PMI data suggest potential negative GDP growth in Q1 2016 (data released 13 May), for the first time since the 2008 global crisis (Figure 1).

    Home sales increased 90% m-o-m in April after a 31% gain in March. As a result, the decline in the growth rate of housing transaction volumes slowed sharply to 1.2% y-o-y in April from 45.3% in March (Figure 2). According to Centaline Property Agency, secondary residential property prices gained 1.5% in the week 18-24 April from a week earlier.

    However, we believe the property market still has to experience a 30% correction. We expect Hong Kong’s job market to deteriorate further as the financial, retail and property sectors all reduce employment. Our US team expects the Fed to hike by 25bp in June. Private housing supply is on track to hit a record-high 92,000 units in the coming three to four years. In its Hong Kong Property Review 2016, the government said it was “Determined to tackle the housing problem and maintain a healthy and stable development of the private residential property market” and that it “has no intention to withdraw the demand-side management measures for the time being.”Already down 12% as of March from the peak of Q3 2015, we expect Hong Kong house prices to fall another 18% through Q2 2017 (see Hong Kong’s property market: A fault line in the economy, 8 April 2016).