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Hong Kong's economy
awakens
By John Berthelsen
Driven by strong liquidity inflows, Hong Kong's
fortunes look as if they are changing dramatically for
the better. And not before time - since the Asian
financial crisis of 1998, the special administrative
region (SAR) has weathered 55 straight months of
deflation that cut property prices in half and wrought
widespread economic damage to the territory's 7 million
residents. Those unemployed and underemployed now
constitute 12.9 percent of the population, according to
government figures.
But, with the Chinese
government suddenly having been hit over the head in
July by the depth of the territory's economic problems,
and with the growing influx of hot money from
institutional investors, suddenly there is new optimism
that the SAR will regain its primacy as Southeast Asia's
financial and business center.
Part of this is
from the influx of foreign money. As John Mulcahy
pointed out in Asia Times Online on September 3 (A random walk over the cliff?), Hong
Kong, which does not officially differentiate between
foreign and local investors, market share of the bigger
stockbrokers has been above 50 percent for most of this
year, compared with levels as low as 28 percent in
1999-2000. That, plus local revival of the property
companies, has driven the Hang Seng Index to 10,908 at
the end of August, an increase of 18 percent from
January. On a more realistic note, total exports and
imports grew by 13.5 percent and 12.1 percent
respectively in January-July 2003.
At the center
of the change is China's new attitude. The seriousness
of the SAR's economic problems, compounded by the onset
of severe acute respiratory syndrome in March, were
brought home in June and July when massive protests
erupted against the inept government of Tung Chee-hwa,
the chief executive who was handpicked by Beijing in
1997 to preside after the handover from British rule.
More than 500,000 people took to the streets to protest
a mooted sedition law that would have outlawed criticism
of the government. While the protests were political in
nature, they were also very clearly driven by anger at
the government. On Friday, Tung announced he was
withdrawing indefinitely any plans to reintroduce the
sedition legislation.
There are reasons to
believe that while China is signaling closer economic
integration, it is standing aside from increasing
political integration, at least for now. That is
possibly because it can't figure out what to do with the
territory's obstreperous middle-class citizens instead
of the students who were massacred with relative
impunity in Tiananmen Square in 1989.
Even
before the protests, in an effort to aid the Tung
administration the Chinese government in June pushed
through a Closer Economic Partnership Arrangement
(CEPA), a free-trade agreement to allow goods to pass
freely between the SAR and the mainland without tariffs.
Beijing also lifted the quota on Chinese tour groups
into Hong Kong, dramatically increasing the numbers of
mainlanders who could visit. It has been estimated that
Chinese tourists to Hong Kong, despite their relatively
low incomes, contributed to as much as 30 percent of
retail sales in the last year. They have now surpassed
in numbers tourists from every other country.
China as well is now allowing more mainland
residents into the territory on an individual basis,
although they can't move to Hong Kong, which should
signal greater economic integration between the two than
ever before (see Hong Kong begins to catch its
breath, August 9). With the projected construction
of a US$1.9 billion, 29-kilometer bridge from Lantau
Island, the site of Hong Kong's international airport,
across the Pearl River to the gambling mecca of Macau
and to Zhuhai city on the Guangdong province side of the
Chinese border, the 50 million people of the Pearl River
Delta are being knitted together after 150 years of
separation that began under British colonial rule.
The yuan's lack of convertibility has created
problems for Hong Kong financial authorities. Of the
Chinese currency in circulation in Hong Kong, only a
small percentage is in its banks, raising the
possibility that Hong Kong's inveterate moneylenders and
money changers will create their own black-market
channels back to the mainland and increasing the
likelihood of money laundering. It also adds to the risk
of counterfeiting.
Partly because of these
concerns, banks have been quietly told that they can
expect to be able to handle yuan business, perhaps as
early as next year, with yuan lending and deposit
services to be permitted at some future time when
conditions allow. Hong Kong has long sought permission
to deal in yuan, regarded as a vital source of future
growth. With China's economy motoring along at an
average 8 percent annual growth, the demand for mainland
financial services is enormous. If Hong Kong were to
remain shut out of yuan financing and trading, that
would increase the impetus for its formidable financial
industry to move to Shanghai.
Currently,
according to the Hong Kong government, despite the
city's economic travails, it remains the world's
12th-largest banking center in terms of external
transactions. Its stock market is the world's
10th-largest in terms of market capitalization and it
boasts the seventh-largest financial center in terms of
foreign exchange turnover, the eighth-largest if
over-the-counter derivatives transactions are included.
Analysts have since the handover in 1997 been
predicting the decline of the territory, in large part
because its isolation from China would increase the
flight of financial services to Shanghai. Yuan deposits
are thus the first step necessary step in developing the
full range of convertible business with China. HSBC
economist George Leung, in a September 5 analysis,
predicted that "it is possible that the pool of renminbi
[yuan] could be the same size as the Hong Kong dollar
base within five to 10 years, forming the base for a
lending business".
To increase the flow of
mainland currency across the border, a Qualified
Domestic Institutional Investor (QDII) scheme has been
announced, although it is not clear when it will come
into being. In addition, there is speculation that
mainlanders will be able officially to invest in Hong
Kong property.
The result of these provisions
should be to dramatically increase liquidity. Already,
according to some estimates, as much as 50 billion to 70
billion yuan (US$6.7 billion to $8.48 billion) are
already circulating in the SAR. Loosened inflows of yuan
alone could bring that figure to as high as 300 billion
yuan, according to Yi Xianrong, a researcher at the
Institute of Finance of the Chinese Academy of Social
Science in Beijing if each mainland resident spends the
6,000 yuan he is now allowed to bring into the SAR - and
that is before the increasing liberalization that is
expected next year.
Yuan repatriation problems
aside, the Beijing government's efforts to stimulate the
economy seem increasingly sure to pay off. The SAR's
economic problems have to a large extent been caused by
the diversion of investment capital into China.
According to HSBC economist Leung, the impact of
increased tourism alone has been substantial,
particularly on hotel accommodation and transport. "We
estimate the change will see an extra 1.5 million to
2.04 million mainland visitors in Hong Kong in 2004 and
an extra 5 million in 2006, in addition to the normal
growth in tour groups," he writes. That would result in
Hong Kong dollar inflows of HK$7 billion to HK$10
billion, ranging up to HK$20 billion by 2006,
translating into an additional 0.5 percent to 1.5
percent of gross domestic product (GDP) growth.
The first beneficiary is likely to be Hong
Kong's depressed property market, which has sagged for
the better part of five years and dropped Hong Kong well
out of the ranks of the world's most expensive cities.
It also dropped hundreds of thousands of Hong Kong
homeowners into the unfamiliar ranks of negative equity.
Their homes were worth less than the down payment they
made to buy them. Today, however, that has begun to
reverse. Hong Kong residents are again lining up by the
hundreds to inspect properties newly on the market. In
August, property transactions rose sharply, up by 31
percent year-on-year to a 14-month high. That in turns
drives the stock market, which is primarily. Credit
Lyonnais Securities Asia (CLSA) forecasts that
secondary-market transactions could double in Hong Kong
in 2004 - after a horrendous year in which they totaled
fewer than 50,000.
Then there is the mainland
issue of the yuan - its relative value against the
world's other currencies and its lack of convertibility.
US Treasury Secretary John Snow's trip last week to
Beijing to attempt to talk the dollar down has had at
least some effect (see Beijing's currency
conundrum, September 9). No revaluation upward
appears to be in the cards, according to a wide variety
of analysts. However, the Chinese seem increasingly
likely to take a variety of other measures, including
the Hong Kong convertibility provisions, among others.
Christopher Woods of CLSA writes that "the odds
must be growing that some type of 'Plaza II' accord will
be agreed before next year's presidential election", if
only for Beijing to let the world know it sympathizes
with US President George W Bush in his country's loss of
manufacturing jobs to China.
Woods points out
that the first Plaza Accord, in 1985, was the trigger
for the so-called "endaka" or high yen that powered the
Japanese economy for the ensuing six years. CLSA argues
that China's present investment boom could run for
another four to five years on the strength a
strengthening yuan before turning into a cyclical bust
again.
If the same pattern is repeated, Woods
writes, it means a few more years of domestic-led
investment growth in China before a peak around the time
of the Beijing Olympics in 2008.
The hope is
that it will last that long. In the meantime, Hong Kong
will be a beneficiary of that pending bubble.
With reporting by Sam Ng of
Asia Times Online.
(Copyright 2003 Asia
Times Online Co, Ltd. All rights reserved. Please
contact content@atimes.com for
information on our sales and syndication policies.)
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