HK must brace for chal­lenges posed by ex­ter­nal events

China Daily (Hong Kong) - - COMMENT - PETER LIANG

In­vestors are try­ing to di­gest a lot of global eco­nomic news that could have pro­found im­pli­ca­tions for the ex­ter­nally ori­ented Hong Kong econ­omy and other re­gional economies and their as­set mar­kets. All at once, Hong Kong faces a sharp turn of events man­i­fested in ris­ing in­ter­est rates, an ap­pre­ci­at­ing US dol­lar, emerg­ing trade pro­tec­tion­ism and the lev­el­ing-off of do­mes­tic in­vest­ments.

Of pri­mary con­cern to in­vestors in Hong Kong stocks and prop­er­ties is, of course, bor­row­ing cost, which is widely ex­pected to go up. The ques­tion is how quickly and of­ten in­ter­est rates will in­crease in 2017.

By some es­ti­mates, which are largely based on US pres­i­dent-elect Don­ald Trump’s in­fla­tion­ary eco­nomic poli­cies, in­ter­est rates in the US can go up to as high as 6 per­cent by 2018. Hong Kong will have no choice but to raise its rates also in or­der to pre­serve the linked ex­change rate sys­tem.

Such a huge jump in the cost of funds within a rel­a­tively short pe­riod of time would al­most cer­tainly send the lo­cal stock and prop­erty mar­kets into a tail­spin.

The prospect of ris­ing in­ter­est rates, com­bined with a strong per­for­mance by the US econ­omy, has al­ready pushed up the value of the US dol­lar against most other world ma­jor cur­ren­cies. The strong dol­lar is ex­pected to be­come a per­ma­nent fea­ture in global eco­nom­ics. It will have a far­reach­ing im­pact on Hong Kong.

In the past sev­eral decades, Hong Kong and many other re­gional economies were tuned to a weak dol­lar and an ex­plo­sive growth in ex­ports to the de­vel­oped economies in North Amer­ica and Europe. Although de­mands in Western mar­kets have de­clined since the out­break of the credit cri­sis in 2007, which plunged the de­vel­oped economies into a deep re­ces­sion, Asian emerg­ing mar­kets could take ad­van­tage of ex­cep­tion­ally low fund­ing cost to help boost eco­nomic growth by step­ping up do­mes­tic in­vest­ment in in­fra­struc­ture and other pub­lic works projects.

An ex­pan­sive bud­getary pol­icy has en­abled the ex­ter­nally ori­ented Hong Kong econ­omy to main­tain eco­nomic growth, al­beit at a more mod­er­ate rate than be­fore, through­out the global re­ces­sion years. Dur­ing that time, the de­pre­ci­a­tion of the lo­cal cur­rency in tan­dem with the US dol­lar, to­gether with stag­nant wages, had at­tracted a large flow of in­com­ing tourists, es­pe­cially from the Chi­nese main­land.

The sub­se­quent in­crease in tourist spend­ing has brought un­prece­dented pros­per­ity to the re­tail and cater­ing sec­tors, which are two of the city’s largest em­ploy­ers. In­deed, Hong Kong was fully jus­ti­fied in con­grat­u­lat­ing it­self for do­ing rea­son­ably well with vir­tu­ally full em­ploy­ment

All at once, Hong Kong faces a sharp turn of events man­i­fested in ris­ing in­ter­est rates, an ap­pre­ci­at­ing US dol­lar, emerg­ing trade pro­tec­tion­ism and the lev­el­ing-off of do­mes­tic in­vest­ments.”

while most other de­vel­oped economies were strug­gling to climb out of the re­ces­sion pit.

But things are fast chang­ing. The strength­en­ing of the Hong Kong dol­lar against most other re­gional cur­ren­cies is pos­ing a se­ri­ous threat to the city’s com­pet­i­tive­ness as a fi­nan­cial and trade ser­vice provider and a tourist des­ti­na­tion.

More­over, nearly all the ma­jor in­fra­struc­ture projects are ei­ther com­pleted or near com­ple­tion. Work on the multi-bil­lion-dol­lar air­port third run­way has yet to be­gin. It will take years be­fore the ex­pen­di­ture on this mega project will make an ap­pre­cia­ble im­pact on the econ­omy.

Some econ­o­mists are fore­cast­ing at least sev­eral lean years ahead when the econ­omy is ex­pected to grow at an ane­mic 1 to 1.5 per­cent a year.

More trou­bling for the ex­port-driven economies of this re­gion is the ris­ing tide of pro­tec­tion­ism in the US and Europe. Anti-glob­al­iza­tion rhetoric is seen to have helped Trump win the US pres­i­den­tial elec­tion. Pub­lic opin­ion seems to fa­vor hard-line can­di­dates for the top posts in sev­eral ma­jor Euro­pean coun­tries in the 2017 elec­tions.

In Hong Kong, the govern­ment has em­pha­sized that in­no­va­tion is the key to the city’s eco­nomic fu­ture. It is also hard at work ex­plor­ing op­por­tu­ni­ties that can help di­ver­sify the econ­omy, which is re­garded as be­ing overly de­pen­dent on fi­nance and prop­erty.

Be­fore such ef­forts can bear fruit, Hong Kong will have to rely on its strong fi­nan­cial struc­ture to keep it­self on an even keel at the on­set of the eco­nomic storm. The in­tegrity of the fi­nan­cial sys­tem is ex­pected to face its sever­est test since the out­break of the Asian fi­nan­cial cri­sis in 1997.

The press­ing ques­tion is how to help small- to medium-sized busi­nesses cope with the fastchang­ing and of­ten per­plex­ing global eco­nomic cli­mate. Most of them are not well pre­pared for this to­tally new ball game. It is a ques­tion that Fi­nan­cial Sec­re­tary John Tsang Chun-wah will have to ad­dress in his bud­get for the next fis­cal year.

The au­thor is a vet­eran cur­rent af­fairs com­men­ta­tor.

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