The outlook for Hong Kong's economy is darkening as rising interest rates are set to slam the city's property market, while the escalating China-U.S. trade war also poses a danger.
Growth is already slowing and economists are forecasting further weakness, with some projecting expansion in gross domestic product to nearly halve next year.
Finance and real estate are major sectors in Hong Kong's estimated $340 billion economy. Close economic and business ties with China will also have a huge impact on its economic outlook, especially since the mainland is poised for a slow-down.
Hong Kong has been a special administrative region of China since the end of British colonial rule in 1997. The territory is economically autonomous and has its own currency, the Hong Kong dollar, which is pegged to the US dollar.
Because of that, monetary tightening by the Federal Reserve is pressuring local rates and affecting borrowing costs in the city's notoriously expensive property sector.
"Recently, the major banks in Hong Kong are starting to hike the mortgage rate so we think this … should weigh on the Hong Kong housing market through 2019," Minoru Nogimori, economist at Nomura in Hong Kong, told CNBC.
Hong Kong's GDP growth is expected to slow to 2.3 percent next year from an expected 4.0 percent in 2018 as consumer spending takes a hit, according to a report by Nogimori and his colleague Young Sun Kwon.
'Adverse effects'
"The biggest risk factor is the housing market from the tighter financial conditions," Nogimori said. "And along with this problem I think the China economic slowdown is also a big one for the Hong Kong economy."
Hong Kong's gross domestic product increased 3.5 percent in the second quarter from the same period last year, according to official figures released Friday. Economists largely attributed the result to weaker growth in fixed investment.
That figure fell short of analysts' predictions of 3.9 percent growth, after the first quarter's robust expansion of 4.6 percent.
"The continued Fed rate hiking cycle and the escalation of U.S.-China trade protectionism will likely pose downside risks for the Hong Kong economy and financial market sentiment," Bank of America Merrill Lynch said in a report.
"Domestically, significant corrections in the property market will likely lead to adverse effects on household balance sheets and overall economic activity," the bank said.
Consumer spending is holding up so far and Hong Kong continues to get a boost from visiting mainland tourists despite a weakening Chinese yuan, said Kelvin Lam, economist for Greater China at HSBC. But financial conditions may already be hurting sentiment.
"There are tentative signs that consumption of durable goods are slowing, suggesting that the gyration in asset markets and gradually rising mortgage payments might be starting to bite," Lam said in a report.
Nomura's Nogimori and Kwon said that the biggest risks for Hong Kong are likely beyond the control of local authorities.
"These include credit default events in China amid corporate deleveraging, escalating U.S.-China trade tensions and an accelerated Fed hiking cycle," they said.
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