With property prices back at their 1997 peak and consumer prices at an all time record (see the first chart below), Hong Kong's business community is worried that the city is in danger of losing its competitive advantage over rivals like Singapore and Shanghai.
It's hardly a surprising concern. In recent months report after report has lamented the sky-high costs of Hong Kong's housing. Back in January, for example, a survey by US-based research house Demographia warned that Hong Kong boasted the least affordable homes in the world.
According to its figures, the city's median home price was a punishing 11.5 times its median gross annual household income. In other words, a typical Hong Kong family would have to save every single cent they earned over 11.5 years in order to buy a typical flat in the city. Since then home prices have climbed another 9 per cent, while salaries for many haven't budged.
Meanwhile, inflation in the city continues to accelerate. Consumer prices rose 5.6 per cent over the year to June. And despite tightening measures on the mainland and the Hong Kong government's own efforts to massage the figures, they are likely to carry on rising. HSBC economists expect the inflation rate to climb as high as 6 per cent by September.
But although these numbers have caught the headlines and raised fears for Hong Kong's future as an international business centre, it isn't obvious that the city's competitiveness is suffering. Partly that's because competitiveness is hard to measure. To do it properly, you'd have to include all sorts of indicators and even then it would be tough to get right.
Thankfully though, we don't have to go to all that effort, because there is a convenient shorthand indicator that analysts use to assess an economy's international competitiveness. It's called the real effective exchange rate. In a nutshell it's an index compiled by taking the weighted average of a currency's exchange rates against the currencies of its trading partners, adjusted for differences in inflation between the different economies. Fortunately, the Bank for International Settlements has done the hard work for us and publishes the indices on its website.
So in theory, to see how Hong Kong's competitiveness is faring compared with that of our rivals, all we have to do is look at how our real effective exchange rate has performed against theirs.