On the up, but price falls not over yet
The strengthening currency and a stock market surge should not be taken as signs deflation is ending, say analysts
Economy-watchers are noting some tantalising trends: property prices have begun rising, and luxury cars in Hong Kong could soon cost more. Further, the financial secretary says he thinks the weak US dollar will ease deflationary pressure by strengthening Hong Kong's exports and services sector.
But has anything about Hong Kong's economy really changed? And after nearly five years of falling prices, is an end in sight? Probably not, according to analysts. They doubt the city's surging stock market and the local currency's recent strength are the first signs of an end to deflation.
In August, the consumer price index was down 3.8 per cent year on year. Financial Secretary Henry Tang Ying-yen said he hoped market forces and currency adjustments would help ease deflation.
'We have experienced 58 months of deflation, so it would be good news if we can go back to inflation,' he said. 'But we don't want that to come too quick, otherwise we will not have an economic soft landing.'
Kevin Lai, an economist at the National Australia Bank, said: 'There's a lot of speculative activity going on, causing the markets to overshoot at the moment.'
He said investors and speculators had been scrambling to reverse the short positions on the local currency they took during the Sars crisis, when they bet the Hong Kong dollar would weaken. Now they were selling US dollars in favour of holding Hong Kong dollars - and that excess money was being channelled into investments such as local stocks and property in search of better returns, Mr Lai said.
He believes it is too early to say whether the influx of funds heralds an end to falling prices. 'Is the economy here really improving? Are our prospects really improving? Is our productivity really improving? Is our price competitiveness improving? The answer is yes, but not to an extent that would justify a [strengthening of the] Hong Kong dollar [against other currencies],' he said.
Ben Simpfendorfer, an economist at JPMorgan Chase, agreed it would take more than a falling greenback to halt deflation. He noted the US dollar has been weak for much of the year, yet Hong Kong has still had deflation.
'Clearly, cyclical developments in the property sector and the broader economy are more important than currency movements,' he said. 'The only thing that will end deflation is a stronger property market and above-trend economic growth.'
Still, Mr Simpfendorfer said sentiment towards the local housing market and the stock market was 'definitely getting better', and if that continued for another six months or a year, it could bring a steady slowing of deflation.
As the US dollar has weakened, so Asian currencies, especially the Japanese yen and the euro, have strengthened. That strength could soon translate into higher car prices for Hong Kong drivers.
Eric Wong, chairman of luxury-car importer Richburg Motors, said the company would raise prices by between 5 and 8 per cent if the yen and the euro continued their strong runs.
'We want to send a warning to the consumer so that when the raise comes, they'll at least be mentally prepared,' he said.
