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Friday, August 28, 1998 Published at 14:33 GMT 15:33 UK

Business: The Economy

Hong Kong battles recession and speculators

The government has been waging a battle against speculators

Hong Kong has fallen into its worst recession for 13 years.

Financial Secretary Donald Tsang said the territory's once-booming economy contracted by 5% in the second quarter of the year.

It is now on course to shrink 4% over the full financial year.

Exports, consumption, inflation down

[ image: Unemployment in Hong Kong is at a 15-year high]
Unemployment in Hong Kong is at a 15-year high
During the last decade, Hong Kong had grown at a rapid pace, expanding 5.3% in 1997.

But because of the uncertainties of Asia's economic crisis, consumer spending is falling, and this is driving down inflation.

According to the latest figures inflation fell to 3.2% in July, sharply lower than 4% in June. For the whole of 1998, inflation is expected to be 3.5%, the lowest yearly rate in 13 years.

Exports in July dropped 13% compared with the same month last year.

Mr Tsang also predicted on Friday that total trade this year would drop 2%, sharply lower than earlier forecasts of a 6.1% growth.

Impact of Russia and Japan

Hong Kong's financial secretary said economic troubles in Japan and Russia and slowing trade threatened the territory's recovery.

He added: "Japan's economic and financial troubles seem to have intensified. This is outside of our control."

"The (Russian) rouble would have an impact on Wall Steet, which would affect global stock markets. Hong Kong will inevitably be affected by the global market fluctuations," he added.

Hong Kong now joins all the other Asian countries in recession. Like Malaysia, South Korea, Japan and Indonesia, the former British colony is being jolted by the year-old Asian economic crisis.

Unemployment at 15-year high

However, the official announcement of a recession was no big surprise to many. Over the past year they have watched their businesses slow down and their investments lose up to half their value.

Unemployment is at a 15-year high of 4.8%, property values have fallen by up to 40%, and interest rates are exorbitant.

The dollar gamble

[ image: The residents of Hong Kong have not had much to smile about recently]
The residents of Hong Kong have not had much to smile about recently
Keeping interest rates high is Hong Kong's main tool to protect its currency's peg to the value of the US dollar.

The Hong Kong dollar is the last fully convertible Asian currency that has not depreciated in the region's financial crisis.

The strong currency is hurting the territory's competitiveness in trade and tourism.

Government intervenes

Speculators are trying to force Hong Kong to scrap its 13-year currency peg with the US dollar. For the last two weeks the administration has tried to fend them off by scooping up shares and spoiling their business.

"We have frustrated their plan," Financial Secretary Donald Tsang said shortly after the Hong Kong stock exchange closed after spectacular trading that saw turnover hitting a record 79bn on Hong Kong dollars ($10.2bn).

The key Hang Seng Index ended the day down 93.23 points at 7,829.74, compared with 6,660.42 when the government opened its campaign on August 14.

Analysts reckon the government has spent as much as HK$100bn in the past two weeks.

But Mr Tsang conceded that the battle was not over yet.

He said: "That is a deterrent, but that does not mean they will not come back. We want to tell them we will not sit with folded arms."

He pledged further goverment measures to beef up regulations aimed at protecting the territory against fresh speculative attacks.

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