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SCMP Reporter

Hong Kong should relinquish its currency's link to the US dollar to maintain its competitive advantage, a leading international economist says.

 Merrill Lynch chief economist Bruce Steinberg yesterday said it was no longer sensible for Hong Kong to maintain its US dollar peg.

 'Hong Kong is a high-priced island in a devalued sea,' Mr Steinberg said.

 'Hong Kong's tourism industry is in collapse and Singapore is a much cheaper place to set up a regional headquarters.'  Mr Steinberg expected the Hong Kong Monetary Authority to retain the peg for as long as the present currency crisis continued.

 He said that could mean one to two more years, adding global equity markets would remain volatile for at least another three to six months.

 Merrill Lynch predicts world economic growth will slow to about 3 per cent next year from an estimated 3.75 per cent last year due to the turmoil in Asia.

 Mr Steinberg said Asia as a region would perform sharply below world averages.

 United States economic performance would also be hit by what he described as the 'Asian Flu', with growth falling by 0.5 per cent next year to 2.5 per cent.

 He also anticipated the fall in US growth would lead the Federal Reserve to reduce interest rates next year.

 He said earnings momentum for US companies would remain positive with corporate profits increasing by 8 per cent next year.

 Mr Steinberg cautioned the regional crisis had yet to play out, with further currency devaluations likely.

 He anticipated the Japanese yen would fall as low as 140 to the US dollar by the end of next year, with the Korean won sinking to 1,200, leading other regional governments to depreciate their currencies.

 'The issue for Hong Kong is whether all the currencies in the [surrounding] countries can continue to depreciate without doing serious damage to Hong Kong's competitive position,' he said.

 Mr Steinberg saved his most caustic comments for the governments in Korea, Malaysia and Thailand which, he said, have thus far failed to recognise the severity of the crisis.

 'Asia has to face a basic fact of life - the Asian development model is finished.'  He said the region's problems were borne from a policy-making culture that allowed politicians, industrialists and bankers to mis-allocate capital from behind closed doors.

 'Problems in this part of the world will not be resolved until policy-makers start addressing that reality,' he said.

 'It would do well for countries to take a lesson from Japan,' he suggested, pointing out that Japanese economic growth has been non-existent throughout the decade.

 'Japan is a place were policy-makers basically denied there was a problem and didn't resolve quickly the problems of the financial system.'  Mr Steinberg said a more transparent economic system was called for.

 'You have to open up - not close down - to the rest of the world,' he said.



Merrill calls for an end to US dollar peg