DE-STOCKING is about to make itself felt in Hong Kong. Anyone who has read the annual accounts of Hong Kong mid to small-sized manufacturers will know exactly what this term means. Hong Kong manufacturers have been producing goods without there being a consequential rise in sales. Inventory has been ballooning, and so has, for that matter, one-year debt. James Montier, at Kleinwort Benson Asian Research, has looked at stock building, and finds it is continuing and inexplicable. The bad news regarding this phenomenon is; it will not go on forever. Worst still, when stock building eventually stops then de-stocking ought to set in. This run down of inventory is set to have an impact on economic activity as measured by Gross Domestic Product change. Barclays de Zoete Wedd economist David Shairp has already poked a critical eye over Government data regarding economic growth and has found it wanting. He says there is something wrong with the current economic yardstick run by the Government in measuring economic growth because it does not fully take into account terms of trade. His argument is, the economy could be contracting in real terms after accounting for terms of trade. Mr Montier comes up with a similar view, regarding the contracting state of the economy, but he is looking at the impact of stock building. The stocking phenomenon and the inevitable de-stocking phase due to hit the economy is another feature of Hong Kong's present economic condition indicating all is not well. After stripping out stocks from government economic data, instead of a nice steady line of growth figures around the five per cent market going back to 1991, you get a very jagged line showing big fluctuations in real economic activity. In the second and third quarters of the year official economic growth was 4.8 per cent and 4.5 per cent. After stripping out stocking, real growth in the second quarter was 1.6 per cent and in the third quarter the economy contracted by 0.2 per cent. Mr Montier says the real economic decline computed with stocking stripped out demonstrates the Hong Kong economy remains stubbornly stuck in the quagmire of recession. It does not reflect the relatively buoyant state of affairs portrayed in Government data. 'Stock building cannot go on forever. Sooner or later firms will be forced to run down the inventory over-hang, resulting in falling production during this phase,' Mr Montier says. De-stocking is expected to come either in the fourth quarter of this year or the first quarter of next year. The Government says part of the reason for stocking is the airport project. However it does not explain the whole story. If the Government is correct we can assume part of the expected de-stocking in the fourth quarter might be linked to airport spending. This implies economic activity data will see a shift from stocking to investment, which might help hold up the headline economic growth data. Mr Montier points out Government consumption spending in the first half grew by about 2.6 per cent, year-on-year. This far outpaced the private sector, suggesting that the public sector is helping to hold the economy up. Given current trends and the drag effect de-stocking could have on the economy, Mr Montier believes the only way the Government can meet its published five per cent economic growth target in 1995 is to aggressively pump the economy. This implies Government consumption spending is set to average 5.5 per cent in the second half of the year. Last week, the Government gave an assessment of the current state of the economy. It said the downward adjustment in the forecast growth rates of private consumption expenditure, private sector building and construction and domestic exports were compensated for by the upward adjustments in the forecast growth rates on machinery and equipment and export services. Mr Montier does not agree. 'We do not share the Government's optimism about the ability of investment, particularly the private sector's contribution, and exports to compensate for the weakness elsewhere in the economy,' he says. Economic growth in the fourth quarter is set to fall to three per cent taking the year average to 4.5 per cent, not the Government's present forecast of five per cent, Mr Montier argues.