We saw wild economic surges and spirals. Tom Holland reviews a tumultuous 10 years
The people of Hong Kong have endured a wild economic ride in the 10 years since the handover, as the territory's famously volatile business cycle surpassed even its own previous reputation for swinging violently from boom to bust and back again.
Scarcely had the wail of bagpipes died and the Royal Yacht Britannia vanished into the mist, than the city was plunged into the turbulent depths of the Asian currency crisis.
Activity rebounded during the brief flare of the dotcom boom, only to recede again as the technology bubble deflated. Already weakened, the economy was hit hard by the successive shocks of the September 11 attacks in the United States in 2001 and the 2003 outbreak of severe acute respiratory syndrome. For a while it seemed that the city's legendary can-do spirit had been overwhelmed by adversity and a mood of blackest pessimism took hold.
The moment of doubt soon passed, however, to be succeeded by a recovery of astonishing vigour as Hong Kong caught the wave of the mainland's post-World Trade Organisation expansion. Today, 10 years from the return to Chinese sovereignty, Hong Kong's economy is once again riding high, untroubled as yet by the inevitable cyclical downswing some believe is approaching.
In early 1997, Hong Kong approached the handover in a mood of economic euphoria. Growth in gross domestic product touched an astonishing 14 per cent in the second quarter of the year as prices in the stock and property markets surged to unprecedented highs, creating new millionaires by the thousand.
As it turned out, the handover very nearly marked the peak of both the bull market in stocks and of the property boom. Just one day later, people had breakfast to the news that Thailand had been forced to devalue its currency under speculative pressure from hedge funds. The Asian economic crisis had started.
In Hong Kong, regional contagion was compounded by the new administration's disastrous housing policy. Entering office, chief executive Tung Chee-hwa sought to bolster his popularity by announcing his government would back the construction of 85,000 new flats a year. Fearing that a deluge of supply would undermine prices, investors rushed to sell both their apartments and the shares of the city's property developers. The stock and property markets nose-dived.
With currencies around Asia plummeting, Hong Kong's exchange rate peg to the US dollar successfully rode out a short-lived speculative assault in October 1997, which briefly pushed three-month interest rates up from 7 per cent to 14.5 per cent. But any hope that the downturn would prove transitory or leave the real economy unscathed were dashed in January when Peregrine Investments, the territory's leading homegrown investment house, went spectacularly bust, ruined by its exposure to the collapsing Indonesian economy.
As the regional crisis deepened through the summer of 1998, speculators renewed their attack on Hong Kong's exchange rate peg, simultaneously selling short the Hong Kong dollar and the stock market.
By mid-August the situation was desperate. Three-month interest rates were at 13 per cent and the Hang Seng Index had plunged to 6,660 points, down 60 per cent from its high 12 months before.
Faced with the choice of abandoning the peg or watching high interest rates destroy Hong Kong's businesses, then financial secretary Donald Tsang Yam-kuen ordered the Hong Kong Monetary Authority to fight back. In an unprecedented move, the authority simultaneously intervened in the foreign exchange market and bought billions of dollars worth of Hang Seng stocks, forcing the index up 8.5 per cent in one session.
'We have total resolve,' declared Mr Tsang at the time, pledging 'to drive those speculators out of the market'.
The battle lasted two weeks, with the three-month interest rate at one point hitting 18.5 per cent. But by the end of August, the government had bought an estimated HK$190 billion worth of shares and driven the Hang Seng up by 18 per cent, forcing the speculators to retire defeated.
Although the currency escaped devaluation, the victory appeared hollow to most of the city's residents. By the end of 1998, the economy had contracted some 8 per cent compared with a year earlier. Unemployment had tripled to more than 6per cent and residential property prices had fallen to half their handover level.
Meanwhile, the government, committed to a programme of higher spending, but deprived of revenue from property sales and investment income, had slipped from surplus into deficit. Perhaps hardest of all, prices, unable to adjust to regional depreciation through devaluation, began to fall, locking the city into a debilitating bout of deflation that was to last for more than five years.
Economic activity did begin to pick up again the following year, as the US information technology boom sparked an upsurge in trans-Pacific trade. Hong Kong benefited from its role as a regional trade services centre and enjoyed its own short-lived bull market in internet stocks as equity valuations shot to an all-time high.
The local tech stock bubble was best embodied by Pacific Century CyberWorks, a company controlled by Richard Li Tzar-kai, son of Hong Kong tycoon Li Ka-shing. PCCW, as it was later renamed, first shot to prominence after the government granted it the land to develop Cyberport without any competitive tender.
Sceptics cried foul, but investor enthusiasm knew no bounds when the company acquired a back-door listing on the stock exchange. Within a year, PCCW's stock had soared more than 17,000 per cent, giving the company the financial muscle to take over Hongkong Telecom, the dominant telecommunications provider, in February 2000.
The bubble soon burst. With the US Nasdaq stock market beginning to slide, PCCW's stock price crashed from a high of HK$121 to HK$20 just 12 months later. As investment in new technology began to dwindle, so did trade across the Pacific and Hong Kong slumped back into economic recession in 2001.
The decline only worsened in the economic downdraft which followed the September 2001 attacks on New York and Washington, as tourism evaporated and global investment flows dried up. Then in early 2003, what looked for a moment like nascent recovery was strangled at birth as the economy was struck down by Sars.
Within weeks, the number of passengers passing through Hong Kong's airport dropped by two-thirds and hotel occupancy fell to about 10 per cent from normal levels of 85 per cent. Retail sales fell by half and restaurant receipts by as much as 80 per cent.
As small businesses either laid off staff or went to the wall, the unemployment rate climbed to a high of almost 9 per cent. Compounding the misery, property prices sank to their lowest yet, down two-thirds from their peak at the handover, pushing 100,000 households into negative equity. Hammered by pessimism, the stock market fell back to half its 2000 high.
Hong Kong's people were not to know it at the time, but the spring and summer of 2003 marked the nadir of their fortunes. By the end of the year, trade had rebounded sharply in response to pent-up demand and tourist arrivals were approaching new highs, assisted by a relaxation of the mainland's travel restrictions.
Meanwhile, property prices finally began to pick up, encouraged by the lowest interest rates in years. The stock market bounced back as foreign investors poured money into Hong Kong as a proxy for the growth on the mainland.
In 2004, after years of deflation, consumer prices at last started to inch higher again. With revenues up sharply, the government's budget returned to surplus, three years ahead of expectations. Unemployment sank back.
Three years later the pattern still holds. the mainland's double-digit growth rates have proved a powerful stimulus to the local economy as Hong Kong's service sector has boomed.
Despite growing openness across the border, Hong Kong remains an important gateway to the mainland economy. But it is in financial services that Hong Kong has really shone. In 2005, the territory's stock market overtook both New York and London in terms of capital raised by companies going public.
Last year, the Hong Kong stock exchange hosted the world's largest initial public offering, raising US$22 billion for the Industrial and Commercial Bank of China.
Of course, the good times will not last. Economies are always cyclical. But 10 years after the handover, Hong Kong's economy is now in stronger shape than at any time since its return to Chinese sovereignty. Enjoy the ride.