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SCMP Reporter

HONG KONG is on the final lap of the handover to China and outsiders will find the territory's business people and financial market practitioners in a more cautious - and possibly even more contemplative - mood than in previous years.

Between 1993 and 1994, the territory swung from a liquidity-driven boom to an interest rate rise-triggered bust.

This time last year, Hong Kong was reeling from collapsing stock and property markets; both having fallen more than 40 per cent from their peaks in the first quarter of 1994.

By the final quarter of 1995, Hong Kong stocks, as measured by the Hang Seng Index, had made steady gains of more than 20 per cent since January 1.

 This has made it one of the top 15 performing major international equity indexes in the world and the best performing market in the Asia-Pacific.

In contrast, the residential property market has remained comatose after massive slides in property values in the previous 18 months. Hopes of a recovery in prices by the end of this year have all but faded.

At present, developers continue to discount prices of new units, which is crippling activity in the secondary market.

 At the same time, developers are using more gimmicks to encourage buyers.

It has become a buyer's market for the first time since 1990.

Banks and developers are clambering over each other to win business in a competitive and considerably shrunken residential market.

According to analysts, a recovery in new residential property prices is possible, at the earliest, around the Lunar New Year.

Office rentals and capital values have also come under pressure as high costs in the territory force international companies to establish operations elsewhere in the region. There is also pressure coming from new supply.

However, the hotel trade has performed well this year. Occupancy rates have been healthy and room rates have continued to rise as supply has declined because of re-development of hotel sites.

 Tourism figures have remained on an even keel, although the flood of Japanese visitors expected - because of the weak dollar - failed to materialise due to recession in Japan.

 For the retail trade, the boom has become a faint memory and recession is a constant daily reality.

 High interest rates and a less buoyant job market has diminished the Hong Kong appetite to 'shop until you drop'.

Taped up window fronts and shuttered entrances with 'For Lease' signs are common at street level from Central Business District to Tuen Mun and Sha Tin.

But there is hope for progress on many fronts.

China's hoped-for economic soft landing - brought on largely through monetary tightening in the summer of 1993 - looks increasingly likely as each month goes by.

To talk of Hong Kong's financial year and economic prospects without a close look at what policy-makers in China have been doing is pure folly.

Always a mainstay in Hong Kong's apparently ceaseless economic growth, the territory's reliance on China as a source of wealth, production platforms, product distribution, not to mention re-exports, is growing - not diminishing. Early fears of a severe reverse in the mainland's economy proved to be ill-founded as policy-makers managed to guide the economy into a slowdown.

Economists are increasingly confident that inflation and Gross Domestic Product (GDP) growth in China will be below 10 per cent by the end of the year.

 On the back of this much-expected slowdown, the economic austerity policy is expected to give way to an easing in monetary policy in the mainland.

The policy-makers' collective hand was aided in the last 18 months by a switch in financing of government activities from monetary financing to debt financing.

This, combined with strong savings growth rising from 35 per cent of GDP to 43 per cent, has meant inflation has been reined in without bringing economic activity to a halt.

 With China's economy set to grow within manageable limits and the process of reform on an institutional level continuing, hopes for monetary easing ought to become a reality with its obvious consequential impact on Hong Kong.

The territory, by the end of next year, is due to benefit from increased economic and commercial activity across the border, feeding through to Hong Kong economic data and corporate profits.

 Analysts had expressed divergent views on Hong Kong's economic performance this year.

A small but growing minority of forecasters pointed to a picture of doom and gloom. They predicted GDP at below 2.5 per cent this year and below one per cent next year, from above 5.5 per cent in 1994.

 For a volatile economy like Hong Kong's, these forecasts spelt potentially disastrous recession.

But these forecasts were way off beam, as analysts overestimated the impact the slowdown in domestic private consumption would have on GDP, and also overestimated the expected slowdown in economic activity linked to China.

 While there was a big drop in domestic consumption, re-exports and a rebound in domestic exports kept the economy ploughing on with a slowdown in the second half to a growth of 4.6 per cent, from about 5.5 per cent in the first, taking the 12-month average to five per cent.

 This year, the territory is due to chalk up its first trade deficit since the Hong Kong dollar was pegged to the US dollar more than 10 years ago.

 The slowdown in trade with China, combined with the demands created by the airport project, according to the consensus view, has caused this deficit phenomenon which seems temporary in nature.

 However, some say the trade deficit has longevity as the territory is less competitive internationally.

 Such a state of affairs threatens the very existence of the Hong Kong dollar peg, especially if there is a new, unplanned wave of capital flight caused by a loss of confidence.

By this time next year, Hong Kong will be on the cusp of the handover. Policy-makers in Beijing and Hong Kong, not to mention politicians in London and Washington, need to ensure that they do not needlessly trigger a big crisis of confidence in Hong Kong.

From the business and economic standpoint, Hong Kong is poised to enhance its role as a provider of trade-linked services and professional expertise, and as a channel through which international capital can enter China while also serving as a launch pad for mainland business venturing out into world markets.



Caution evident but hope, too, as China progresses