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Monday, June 29, 1998 Published at 08:53 GMT 09:53 UK


What a difference a year makes

Hong Kong investors have not had a happy year

One year ago Hong Kong was in the midst of the biggest boom in its history, with everyone hoping to get rich quick through investments in stocks or property.

Now the former colony is mired in recession, with the stock market down by 50% from its peak. The economy contracted by 2% in the first quarter of 1998.

The government has announced a $6bn rescue package to help the ailing economy. Unemployment is rising towards 5% and the budget surplus has turned into a deficit.

What went wrong?

The Asian crisis began one day after the handover when Thailand devalued its currency, the baht, on July 2.

Hong Kong had pegged its currency to the US dollar, like other countries in the region. This allowed cheap borrowing from abroad to fuel the property boom. But unlike some of the other Asian currencies, Hong Kong chose to defend its currency link with the dollar.

This was seen as vital in keeping Hong Kong's status as an international trade centre intact after the handover.

Property crash


[ image: The property sector took a beating]
The property sector took a beating
The cost of this decision has been extremely high interest rates to prevent an outflow of funds. The level of interest rates also pricked the "asset bubble" of high property prices. Property companies in turn were the leading players in the stock market boom.

At the height of the property boom in the last six months before the handover, house prices rose by 30%. Now the prices index has turned sharply down and the government has agreed to suspend sales of publicly owned land for a year to help revive the market.

But it has been too late for the stock market, which reached a record high of 16,820 on August 7, l997. As country after country in Asia devalued, confidence in shares plummeted, and the Hang Seng index is now trading around the 8,200 mark.

Economic downturn

Economists predict that the Hong Kong economy will take years to recover and will probably never return to the boom days of the past. Deutsche Morgan Grenfell predicts an economic contraction of 2.5% this year and 1% in 1999.

Hong Kong's economy is closely linked to three others - China itself, where growth is now slowing down, Japan, where bad banking debts have contributed to a recession, and USA, the main destination of Hong Kong's exports. As an entrepot mediating trade flows between these three giants, any trade disruption has immediate effect on its own economy.

Government spending grows


[ image: Tung Chee-hwa was forced to intervene]
Tung Chee-hwa was forced to intervene
Hong Kong has had tor revise its traditionally orthodox government spending policies in order to cope with the effects of the recession.

The government normally spends most of its budget on infrastructure, such as the new airport, roads, port facilities and environmental improvements.

But on June 22 Tung Chee-hwa, the post-colonial ruler, announced an economic reform package, It included tax and rate rebates, a profit-tax exemption for companies, and measures to help the property market.

There is no social security safety net to protect people thrown out of work, which contributes to the passion for investment by Hong Kong residents. But this may have to change as unemployment becomes a more permanent feature of the landscape.

The dollar peg limits the government's ability to intervene in money markets. But the crisis measures have driven the budget into deficit. The projected surplus in the next financial year of HK$10.7bn, it is now expected to turn into a deficit of HK$21.7bn.

And the budget deficit has led the US ratings agency, Standard and Poors, to put the currency on review for a possible downgrade.





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In this section

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Voices of Hong Kong

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Hong Kong: Who was wrong?