Chief Executive Tung Chee-hwa is caught between a rock and a hard place. He presides over an economy that is deflating with no end in sight, a stubbornly fixed exchange rate and a banking system that last weekend saw another chunk of its asset base cut away by more property price cuts.
Four years after the Asian financial crisis hit, the SAR shows no sign of recovery. Hong Kong alone maintained its fixed exchange rate, but the resulting collapse in property values wiped out middle-class wealth. Unemployment is rising, government finances are worsening and calls for action are multiplying.
Since June 1998, the Government has tried every trick at its disposal to soften the impact of tumbling property prices. Direct intervention in the stock, land and housing markets has brought no sustainable relief.
Recent weeks have seen calls from every political quarter for fiscal expansion to inject demand into the economy and relieve the pain of those suffering negative equity. Mr Tung has sought to dampen expectations, claiming a possible HK$50 billion budget deficit for this financial year rules out public largesse.
In short, Hong Kong's domestic economy looks to be suffering a system failure. An eerie quiet pervades the property market. Lay-offs are increasing, with unemployment predicted to climb to 6.5 per cent from 4.9 per cent. An already anaemic full-year growth figure of 1 per cent seems sure to disappoint.
Like all export-focused Asian economies, Hong Kong is reliant on United States-consumer demand, but the dislocating effects of war in Afghanistan and profound global economic uncertainty are hitting trade.
