Hong Kong is well placed to ride out coming slump

PUBLISHED : Friday, 08 June, 2012, 12:00am
UPDATED : Friday, 08 June, 2012, 12:00am


These are nervous days in Hong Kong. Earlier this week Financial Secretary John Tsang Chun-wah said there are turbulent times ahead, warning that Hong Kong's economy will suffer if the euro-zone crisis deepens, and that property prices could slump.

Meanwhile, the city's business people are looking anxiously at the mainland, where slowing growth yesterday prompted the central bank to cut benchmark interest rates for the first time since 2008.

The nervousness is understandable. As a small open economy that makes much of its living from financial services and China's foreign trade, Hong Kong has always been exposed both to volatility in international financial markets and to any slowdown in demand, either in developed markets or on the mainland.

Now it looks as if we may be in danger of seeing a heightened bout of market volatility at the same time as a simultaneous slump in demand from both Europe and the mainland. No wonder people are worried that the city could sink back into recession this year.

Happily, the picture isn't quite as black as it has often been painted.

First, let's consider the financial impact on Hong Kong of a potential Greek euro-exit, or of a Spanish banking collapse.

Sure, there would be a lot of short-term stock market volatility as international investors slash their exposure to risky assets. But considering Hong Kong's benchmark Hang Seng index has fallen 14 per cent from its end-February high, it's likely a lot of the bad news is already priced in.

And if the aftermath of the 2008 Lehman Brothers implosion is anything to judge by, Hong Kong, with its stable and well regulated banking sector, could see a heavy influx of capital in search of safe haven in turbulent times.

Fears about the effect of deleveraging by European banks on Hong Kong have also been exaggerated. According to Credit Suisse, euro-zone banks made up just 8 per cent of local loans last year.

Similarly, Hong Kong bank lending to risky euro-zone institutions and the city's holdings of debt issued by peripheral euro-zone countries are both tiny, so the direct losses inflicted by any European default or devaluation will be small.

Hong Kong banks' exposure to the mainland is greater. But most of those loans are to high-quality borrowers, so the risk of asset deterioration in the event of a Chinese slowdown should be slight.

The risk of a trade slowdown is more serious. Even there, however, the dangers have been overstated. Only around 10 per cent of Hong Kong's goods exports go to the euro-zone, and two-thirds of those are destined for Northern Europe, where demand is relatively healthy.

In any case, the goods shipped by Hong Kong are almost entirely re-exports, and the genuine value added by the city is low, which means the effects of any slowdown will be correspondingly small.

These days service exports are more important to Hong Kong than trade in goods, with the mainland our biggest customer. That means slower growth north of the border could have a painful impact here. But according to HSBC, anything less than a full-on hard landing on the mainland is unlikely to tip Hong Kong into recession, even if demand from the euro-zone slumps further.

There are also concerns about the effect of a mainland slowdown on Hong Kong's retail sector, especially after sales growth dipped to an 11.4 per cent rate in April, the weakest figure - barring Chinese new year distortions - since 2009.

With the city's shops increasingly dependent on free-spending mainland visitors, analysts fear softer demand could hit both profits and jobs.

Maybe, but some easing from the headlong expansion of recent years always looked inevitable. There is still plenty of pent-up demand for shopping trips to Hong Kong, and if the growth rate does slow, the fallout will be limited largely to retailers who have recently signed on to pay silly rents for prime locations in the unrealistic expectation of continued 28 per cent sales growth.

But more than financial services, trade or retail sales, with home prices in the city currently at a record high, Hongkongers are worried that a new slowdown will trigger a property market slump.

Yet although some softening is possible, there is little danger of a 1997-style crash.

With the supply of new homes set to fall short of demand for at least the next three years, and with mortgage rates likely to remain low for the foreseeable future, there will be plenty of support for the market should prices ease off from current levels.

As such, Hong Kong can regard the prospect of a coming slowdown, if not exactly with equanimity, at least with the knowledge that the city is well-placed to ride out any downturn with out too much pain.