Executive Summary

HIBOR Swings & HKD Funding Rally Analysis

 HIBOR has rebounded to 2% in August 2025, marking the first time

since early May as Hong Kong's monetary system undergoes structural
normalization.
Key Institutional Views
Goldman Sachs: Normalization Expected

JPMorgan: 2-2.5% Target H2

2% HK$53.7B HK$940B UBS: Benefits Priced In

Current 1M HIBOR Aggregate Balance Southbound Flows YTD

 Automatic Adjustment: Aggregate balance declined from HK$177B peak to

HK$53.7B, triggering monetary tightening through Linked Exchange Rate
System

 Record Capital Flows: Mainland Chinese investors approaching HK$1 trillion

milestone in Hong Kong stock purchases

 Sector Divergence: Banking sector benefits from higher margins while

property faces mortgage cost pressures
Market Context & Background
Hong Kong's Unique Monetary Framework

 Linked Exchange Rate System (Since 1983)

• HKD pegged at 7.75-7.85 per USD

• Automatic intervention at weak-side (7.85)

• Aggregate balance adjusts to maintain peg

• HIBOR responds to liquidity changes Key Market Characteristics

Global Financial Hub


4th largest globally

   
Stock Connect Programs
Direct mainland access

Financial Bridge Between China & Global Markets 

Offshore RMB Center
Primary global hub

2025 Volatility Timeline 

IPO Gateway
210 companies in pipeline

Early 2025: Rate Peaks

HIBOR above 3% due to Fed policy uncertainty

May 2025: Liquidity Surge

HIBOR collapsed to near 0% from capital inflows

August 2025: Normalization

HIBOR rebounds to 2% as system self-corrects
 Aggregate Balance vs HIBOR Recovery
Current HIBOR & Funding
Conditions
Dramatic Recovery from May Lows

2.0% ~0%
1M HIBOR (Aug 2025) May 2025 Low

 Aggregate Balance Transformation

Peak (2025): HK$177 billion

Current: HK$53.7 billion

Pre-influx baseline: HK$44 billion

Key Observations
 Automatic Mechanism: When HKD weakens to 7.85,  70% decline in aggregate balance triggered rate normalization

HKMA buys HKD/sells USD, reducing aggregate balance  System demonstrates automatic stabilization capability

 Current levels still above pre-2025 baseline

 Term Structure: Entire yield curve affected, with
overnight rates showing highest volatility

 Banking Impact: Varied effects based on funding

structure and deposit base composition
 USD-HKD Interest Rate Differential
Federal Reserve Policy Impact
Primary External Driver of HKD Funding

Fed Funds Target Range HKMA Base Rate

4.25-4.5% 4.75%

 Interest Rate Differential Effects

When HIBOR collapsed to near-zero in May while USD

rates remained elevated, the significant interest rate
differential created compelling incentives for carry
trades (borrowing HKD to invest in USD assets).

 HKMA Guidance: Public should be "mindful of the Key Implications

possibility of HKD interest rate increases" as global
 Narrowing differential reduces carry trade attractiveness
conditions evolve  Fed policy uncertainty creates volatility in HKD funding

 Potential Fed cuts would ease pressure on HKMA interventions

 Market Expectations: Two potential Fed rate cuts in
2025, timing uncertain due to trade policy and inflation

 Transmission Channels: Carry trades, capital flows, and

currency market positioning all affected by rate
differential
 China Economic Indicators Dashboard
China Economic Slowdown
Effects
Key Indicators Below Expectations

 July 2025 Economic Performance

Industrial Output (YoY) 5.7% 

Retail Sales (YoY) 3.7% 

Fixed Asset Investment (YTD) 1.6% 

Home Prices (YoY) -2.8% 

GDP Growth Forecast

 Property Sector Crisis: Home prices falling for over 2

years, creating spillover risks to Hong Kong developers

 Banking Shock: New yuan loans contracted in July for

first time in 20 years

 Capital Flow Impact: Economic uncertainty driving Source: Reuters survey of economists, August 2025
record mainland investment into Hong Kong
 Monthly Southbound Flows (2025)
Record Mainland Capital Flows
Unprecedented Southbound Investment

HK$940B HK$35.9B
Year-to-Date Flows Record Single-Day

 Approaching HK$1 trillion milestone - representing

a fundamental shift in cross-border investment patterns
and Hong Kong's role as China's primary offshore
financial hub.

Key Drivers
Market Impact
 Valuation Discount
$ Natural HKD demand % 2.4% of HSI stocks  24% of HK turnover
Hong Kong-listed Chinese companies trading at significant discounts

 Stock Connect Enhancement

Dual-currency counters reducing transaction costs

 Technology Focus
Strong interest in AI breakthroughs and tech sector
 GOLDMAN SACHS RESEARCH Goldman Sachs Property Sector Forecast

Goldman Sachs Analysis

HIBOR Normalization & Property Outlook

"The HIBOR rebounded to 2% yesterday (18th), marking

the first time since early May... a situation in line with the
broker's expectations."
— Goldman Sachs Research Report, August 19, 2025

 Aggregate Balance: Decline from peak of HK$177 billion

to HK$53 billion matches pre-liquidity influx baseline of Key Property Sector Forecasts (2026)
HK$44 billion
+5% +2% Flat
 Developer Impact: Hong Kong developers expected to Property Prices Retail Rents Office Rents
underperform after outpacing HSI during low HIBOR
period Source: Goldman Sachs Research Report, July 28, 2025

 Mortgage Market: Floating-rate mortgages being

repriced to P-rate cap of 3.5% as HIBOR normalizes
 Hang Seng Index Targets
JPMorgan Market Outlook
H2 2025 Hong Kong Forecast

 Key Rate Projections

3-month HIBOR (H2 2025): 2.0-2.5%

Current 3-month HIBOR: 2.0%

USD Index (End-2025): 94.7

USD Index Change: -4.0%

 Historical Context
 Sector Allocation

Financials Consumer Discretionary Property Utilities

+14% +20%
Average HSI rise when 1-month HIBOR Average HSI rise when USD index
falls >1.5% declines >5%
 Top Stock Picks

• AIA • BOC Hong Kong

• Galaxy Entertainment • HKEX Economic Indicators
• Link REIT • Techtronic Industries
 Hong Kong QMI rose to expansion range (June 2025)
% HSI EPS growth forecast: 7.7% (2025), 7.3% (2026)

Financial sector driving upward EPS revisions

 UBS RESEARCH Banking Sector Performance vs HIBOR

UBS Banking Sector Analysis

HIBOR Impact Already Priced In

"Hong Kong banks' share prices already reflect the positive

impact of the HIBOR rebound on net interest income."
— UBS Research Report, August 21, 2025

 Net Interest Income Forecasts

BOC Hong Kong -7% Hang Seng Bank -9%

UBS Banking Sector Outlook
Bank of East Asia -11%  Positives: Strong capital positions, stable deposit bases
 Concerns: "HIBOR rebound may exacerbate the risk of non-performing loans from
banks' exposure to Hong Kong CRE"
 Key Risk Factors
 Recommendation: Selective exposure to banks with diversified revenue streams
Commercial Real Estate

China Slowdown
 Sector Impact Heat Map
Sector Impact Assessment
Differential Effects Across Hong Kong's Economy

 Banking: Primary Beneficiary

Banks with large retail deposit bases benefit most from

HIBOR normalization, as deposits reprice slowly while
floating-rate loans adjust upward, widening net interest
margins.

 Property & Real Estate: Significant Headwinds

Higher mortgage costs affecting both residential demand and
commercial financing, with Goldman Sachs noting "floating-rate
mortgages being repriced to P-rate cap of 3.5%"

 Manufacturing & Trade: Cost Pressures

Working capital financing costs increasing, particularly affecting
SMEs with limited access to alternative funding sources

Consumer & Retail: Mixed Effects Negative Impact Neutral/Mixed Positive Impact

Luxury retail showing resilience while mass market faces pressure Source: Analysis based on Goldman Sachs, JPMorgan, and UBS research reports
from potential consumer spending impacts

 Utilities & Infrastructure: Stable

Defensive characteristics providing stability despite higher financing
costs for capital projects
 Investment Strategy Matrix
Investment Strategy
Implications
Navigating HIBOR Normalization

 Sector Rotation Opportunities

HIBOR normalization creates a more complex

environment where sector selection becomes
increasingly important. Banking sector benefits from
higher net interest margins must be weighed against
credit quality concerns.

 Fixed Income Attractiveness

Higher rates have restored appeal to HKD cash and bond
Key Investment Considerations
investments, with money market yields now competitive
Banking sector benefits from higher Property developers face mortgage
 NIMs  cost pressure
 Property Investment
Higher borrowing costs create headwinds, but mainland Chinese Mainland capital flows support
investment and Hong Kong's regional hub status provide potential  Fixed income yields now competitive  equities
offsets

$ Currency Strategy
Narrowing interest rate differential reduces carry trade
attractiveness, but structural southbound flows support HKD
 Key Events Timeline
Forward-Looking Analysis
September 2025
Key Factors Shaping Hong Kong's Monetary Federal Reserve Policy Meeting
Future Potential rate decision with significant implications for USD-HKD interest rate
differential and carry trade dynamics

 Outlook Summary
October 2025
Several interconnected factors will shape HIBOR and China Q3 Economic Data Release
HKD funding conditions in the coming months, with Key indicators to assess recovery trajectory and potential policy responses
affecting capital flows
global monetary policy, China's economic trajectory,
and structural capital flows playing crucial roles.
November 2025
HK$1 Trillion Southbound Flow Milestone
 Fed Policy Trajectory Expected crossing of unprecedented capital flow threshold with potential market
Markets pricing in two potential rate cuts for 2025, with timing sentiment impacts
uncertain due to trade policy developments and inflation dynamics

 China's Economic Recovery December 2025

Disappointing economic data suggests structural challenges may HKMA Annual Banking Conference
persist, affecting capital flows and regional financial conditions Policy guidance and regulatory outlook for 2026, including potential changes to
monetary framework
Capital Flow Sustainability
Approaching HK$1 trillion milestone in southbound flows, with
structural factors supporting continued mainland Chinese interest Q1 2026
Hong Kong Digital Currency Pilot
 Technological & Structural Changes Scheduled expansion of e-HKD testing with potential long-term implications for
Digital banking expansion, fintech services, and cross-border monetary transmission
payment systems evolution influencing funding dynamics
High Impact Medium Impact Low Impact
 Implications for Stakeholders
Key Takeaways & Conclusions
 For Investors
HIBOR Swings & HKD Funding Analysis
 Sector rotation opportunities as rate normalization creates winners and
losers
The extraordinary HIBOR volatility of 2025 provides  Fixed income attractiveness restored with higher yields
valuable insights into Hong Kong's monetary system  Reduced carry trade opportunities as interest rate differential narrows
and its integration with global financial markets.

 For Policymakers
1 System Resilience Demonstrated  Linked Exchange Rate System demonstrated effectiveness under stress
Automatic adjustment mechanisms in Hong Kong's Linked Exchange
 Continued vigilance needed for property market risks
Rate System effectively managed extreme conditions, with
aggregate balance declining from HK$177B to HK$53.7B  Importance of clear communication during monetary volatility

2 Structural Capital Flow Shift

Record-breaking HK$940B southbound flows approaching HK$1T  For Businesses
milestone represent a fundamental change in cross-border  Prepare for higher borrowing costs as HIBOR stabilizes at 2-2.5%
investment patterns
 Reassess capital structure and funding strategies

Differential Sector Impacts  Consider mainland Chinese investment opportunities amid record flows
3
Banking sector benefits from higher margins while property faces
significant headwinds, highlighting importance of nuanced analysis
 Hong Kong's experience provides valuable lessons for
understanding how small, open economies navigate complex global
4 Expert Consensus on Stabilization
Major institutions (Goldman Sachs, JPMorgan, UBS) converge on environments 
HIBOR stabilizing in 2-2.5% range by Q4 2025