• Fri
  • Apr 18, 2014
  • Updated: 10:25am
Monitor
PUBLISHED : Thursday, 02 May, 2013, 12:00am
UPDATED : Thursday, 02 May, 2013, 3:47am

'Made in America' means added pain for Hong Kong

City could lose its regional cost advantage as cheaper fuel and fresh investment help bring the US dollar - and the HK dollar - back to life

For the past 10 years, Hong Kong's economy has been boosted by twin external superchargers.

Now, both are in danger of breaking down.

Part of the performance boost over recent years was provided by the rapid growth of China, which yielded a bonanza for the city's financial, trade services and retail sectors.

But Hong Kong also got a propellant charge from its exchange rate peg to the US dollar.

Since 2002, the US dollar has lost a third of its value against a basket made up of the currencies of its trading partners and competitors (see the first chart).

Because of the peg, the Hong Kong dollar has also declined in value. Since 2002, it has fallen by almost a quarter against its own trade-weighted basket of currencies; a fall that's sharply enhanced the city's competitiveness.

Sure, some of the competitive gain was offset by the steep rise in Hong Kong's property prices over the same period.

But only some.

Thanks to currency depreciation, Hong Kong won a powerful cost advantage relative to its Asian neighbours, which helps to explain why the city has outperformed Singapore in terms of real output growth per head over recent years.

Now, ominously, Hong Kong's twin turbines may be about to run out of gas.

First, as even the China's-going-to-take-over-the-world brigade now recognise, the mainland is shifting to a structurally slower growth trajectory.

Second, the US dollar, long regarded by many as a currency in terminal decline, looks as if it could be primed for an extended period of appreciation.

Three related factors are likely to drive the US dollar higher.

First, the US currency's long decline, coupled with flat local currency unit labour costs over recent years and the boom in cheap domestic shale gas, means the US has clawed back much of its own lost competitiveness.

As a result, US companies are no longer "offshoring" jobs to cheaper countries in Asia.

Given the restored cost advantage, many analysts believe they will soon begin "onshoring"; taking advantage of their low leverage levels to invest in new factories at home rather than abroad.

Such a revival in manufacturing - and in a report yesterday HSBC noted rising capital expenditure across a range of US industries (see the second chart) - should further reduce the US trade deficit, which has already fallen by 30 per cent since the crisis.

That will directly support the US dollar, but according to Hans Redeker, a foreign exchange strategist at Morgan Stanley in London, it will have a second, indirect, strengthening effect.

Fresh investment at this point in the cycle, he argues, will raise US productivity, which in turn will attract capital inflows, further boosting the US dollar in a positive feedback loop similar to the inward investment surge of the late 1990s.

Finally, any strengthening of the US dollar will prompt investors to abandon it as a funding currency for carry trades in favour of the yen.

Such a switch - already emerging as a result of Tokyo's new-found enthusiasm for reflating the Japanese economy - would remove a powerful downward force weighing on the US dollar, providing further impetus to appreciation.

It's early days yet, but where the US dollar goes, Hong Kong's pegged currency must follow.

That could prove painful. Between 1995 and 2002, the US dollar appreciated by almost 50 per cent on the back of the US inward investment boom.

As a result, Hong Kong's competitiveness was severely eroded. When the Asian crisis hit, the city found itself forced to readjust through a long period of low growth and deflation. Over the coming years, history may be about to repeat itself.

tom.holland@scmp.com

Share

13

This article is now closed to comments

babyhenry
Can't agree more, HK is so low tech that the octopus card is sttill the most high tech there is in HK for the mass to enjoy. All HK knows is building rubbish properties, and gambling in the stock market. Once upon time, we had a movie industry & a manufacturing indutry, our watches matches the swiss and Japanese. Now what does HK make? nothing pretty much.
The Milk Powder fiasco is based on idiotic logic as a "resource" being taken away, yet HK didn't produce these milk powder they were imported, so they are not HK "resource". HK has no resource besides from "Knowledge - Medical, Education & Engineering". Yet when the population that couldn't even define resource correctly it speaks very loudly that your last advantage is close to be gone.
Couldn't agree more with SF, once the Yuan is allow to Float, HK couldn't stand a chance against SH, which have much more talent than HK only that they are being constrained, this is clear to anyone with an openmind with eyes to see for themselves, only those idiotic local fools in HK who dont want competition because deep down they know they wont stand a chance couldnt see by closing their eyes shut.
not to mention unlike singapore also have high tech industries, like being a world leader in Clean water tech. Good Luck HK - YOU WILL NEED IT. This is what happens when you live with your head up yo **** all this time & "brainwashing" yourself to really believe that you are superior.
SpeakFreely
Let me share with my frustration with "low tech" Hk. Given SCmP is the top newspaper but your online tech is very low tech. I complained a month ago and quickly responded by your editor and I'm pleased but the problem still not fixed after a month. I'm using iPad. Often I found the old problem was there is no "reply" box on many comments. Kind of appear and disappear. Recently, seem improving, not totally gone, but another new problem arises. When I post a comment and happen few time so far, that it responded that my comment w posted but when I refresh it is never posted and disappear for few minutes. And sometime after few minutes it appear again. As a tech guy, I find this totally unacceptable and in fact if you all HK many corporate websites of large organizations, many are are really low tech! Hk needs to spend more money on tech to compete.
impala
This is absolutely true. And it doesn't only happen on an iPad but also on regular desktop browsers. This is definitely a server-side problem, not one dependent on the browser or device you use.

Comment reply/like/dislike buttons disappear. Pagination malfunctions to the extent that comment reply threads disappear if paginated. Showing 'All' comments still only shows a random (?) selection. There is no notification for replies to comments you make, and so on.

This is the single biggest failure in what is otherwise a recently hugely improved website. SCMP web team, please fix this basic functionality.
SpeakFreely
Welcome to Hk ....world of low tech.
SpeakFreely
Not only is the currency issue but overall HK efficiency is very low as we are not technology oriented. Our employement rate is artificially "jacked" up with many low skill workers not normally employed by many developed economies such as US or Germany. Example, HK employs most in security guards, gas station attendants ( normally 2 person per gas bay per shift vs. in US only one cashier overlooking 10 gas bay), restaurant helpers mostly 40 to 50 years old work very slow and inefficient, etc...if you take out this low skill group, our unemployment rate for sure will surpass US 7.9%.
If you look at our export companies including Li & Fung, Espirt, Wong's Eletronics, Vtech alike they are pretty flat, only our property developers enjoy rises. Lack of new local startups and major IPO in the past 10 years. Our population is aging fast with low efficiency. SH will eventually replace most of HK once RmB get floated.
SpeakFreely
Let me share with you how inefficient is HK labor. Take property management as an example. In HK a low density or high end property management will charge around Hk $3 to $4 per sq ft per month. I have a house in US in a golf gate community, my home is back onto golf course. We have 27 holes, 8 lighted tennis courts, huge gym, huge multiple swimming pools, 5 star hotel style clubhouse serving better food than Hk 5 to 4 stars hotel, clubhouse of over 35,000 sq ft indoor facilities. My home is 2500 sq ft and including golf membership, free golf and free access to all clubhouse,and my management fees , I only pay less than hk$4,000 a month. That is hk$1.6 per sq ft but we have golf and everything that you can't find in Hk in one single gated community. the quality of the place can not be matched by any gated community in hk i know if. If you very find a place like this in Hk, what would be the manger net fees per month per sq ft? I would say around $10 per sq ft. Because Hk efficiency is much lower, with less tech, that's why we have to charge much more to give the same service quality.
maecheung
It is not that HK efficiency is much lower, it is the GREEDY developers, who also owns the management companies as well. Land prices in HK are extremely HIGH too.
HK-Explorer
You are missing the bit of the difference between HK and US. In HK you don't pay municipal taxes. This is because allot of municipal governments do in US is done by propert management companies ex garbage collection, nearby works on common areas etc... Also they purchase endurance for outside of buildings in all HK. Finally allot of security in H.k is done by propert companies with guards, cameras etc..
HK has far less costs than western countries. Management fees is the only one that is higher.
impala
I am sure that you can appreciate that the comparison does not hold. The size of your home does not reduce the fixed cost of the maintenance of the common facilities. If your home in the US would have been 1000 sq ft, but the common facilities are the same, the cost would have been HKD 4,000 per square foot per month.
And the number of residences matters a lot too. How many residences are there in US complex with golf course and so? I would have to guess there is a lot, if not it would hardly be possible to keep up the cost of all of those facilities for
You would need to calculate the total fees charged to all the users in your US complex, then divide by the total sq ft of facilities. Do the same for your Hong Kong complex. If the management cost per sq ft of facilities in Hong Kong is significantly more expensive than the management cost per sq ft of facilities in the US, then we can begin to draw conclusions about factor productivity (and even then, with a lot of caveats).

Your current comparisons is between apples and broccoli, and tells us unfortunately nothing about labour productivity. At most, it tells us perhaps that the cost of land in the US is far lower than in Hong Kong, which is hardly exciting.
SpeakFreely
Haha....only 600 to 700 household...another point is their min wages are around Hk$60 to 80 an hour. The only reason they can do it is because they use machine and people are more efficient...u have to go to take a look they are very efficient!

Pages

Login

SCMP.com Account

or