The fortunes of the Hong Kong banking sector this year will be closely tied to how the United States economy fares in the coming year, according to market watchers. While abundant liquidity is expected to continue to fuel demand for services in the retail banking sector, investment, commercial and wholesale banks will be hit if the US economy takes a major and prolonged fall. Recently, there was grim news coming from abroad. Global commercial and investment banks, including big names such as Morgan Stanley, Goldman Sachs, Deutsche Bank and Citigroup, announced job cuts totalling tens of thousands as a result of the weakening US economy and credit crunch, triggered by the subprime crisis. Retail sales are also falling as Americans curb their spending. The job cuts touched Hong Kong last month, when financial magazine IFR Asia reported that Bank of America laid off several members of its Asian loan and bond teams, including its head of debt capital markets Swarup Patel. And there are fears that there will be further layoffs in other Hong Kong institutions because of growing concerns of a serious economic downturn in the US later this year. 'I am quite sure that the US is already in a downturn,' said George Leung Siu-kay, adviser for strategy and economics at HSBC in Asia-Pacific. 'The question is not whether it is in recession right now, but how long and deep it will be. That will depend on what actions the US Federal Reserve takes.' While in Asia, strong domestic demand is expected to partially offset declines in the export sector. He also said it was highly likely that a substantial correction in the US economy would hurt the financial services sector through sentiment. One sector expected to be mostly immune is wealth management, which will remain a strong growth area in Asia. Mr Leung said a combination of the wealth that had accumulated in the 11 years since the Asian financial crisis in 1997, wider investment options, and investors seeking long-term investment, as opposed to short-term gain, is expected to continue to fuel the demand for financial planners. On the corporate side, firms are likely to be affected by the cautious sentiment and hold back on fund-raising activities and initial public offerings (IPOs). Investment banks are expected to be hit, but Mr Leung predicted that many institutions are likely to avoid making massive job cuts in anticipation of stronger-than-usual activity from a backlog of postponed fund-raising when the economy picks up. But Babak Nikzad, partner in charge of financial services practice at accounting firm KPMG, said new investment banking deals had decreased dramatically since the end of January. He expects market conditions to stabilise in a few months, but they will not necessarily return to the high levels witnessed in early 2007. However, he warned that massive job cuts of the type witnessed in the US could happen in Asia - and in Hong Kong - if the market remains volatile for the next six months. 'It could happen if the IPO market dries up for a prolonged period of say six to nine months,' said Mr Nikzad. 'You would basically have a bunch of very expensive people sitting around at their desks doing nothing. It would be very difficult to justify that cost. For the time being, people are still holding off [job cuts]. 'People still think that the market will come back in a relatively short time, so people are going to bear it and hope that it is as short as possible,' Mr Nikzad said. In other sectors, wholesale banking and trade finance are also likely to be hit if the US economy goes into a recession, as exports to the major market from Asia drop off. But the retail sector is likely to be spared by falling interest rates, spurring activity in the property market and demand for mortgages. While in Wall Street, bonuses dipped by 2 per cent, Matthew Wu, manager for front office banking at recruitment agency Michael Page, said he expected there would have been a slight drop in bonuses at investment banks in Hong Kong this year compared with last. He said many had kept quiet about how much they were paid this year in bonuses, although it was not known whether this was because they were unhappy with the amount paid out, or whether they were asked to not divulge the sum. 'I suspect that good performers at the top investment houses are still being paid relatively well. But marginal companies and performers may not have got the bonuses that they have been promised, or what they expected. 'The US-centric houses are going to be affected much more. We met with a European house, which was not affected at all, but then they were not a big payer in bonuses,' he said, adding that salaries are expected to remain fairly stable in the coming year.