Falling equities put pressure on GDP growth

The 25 per cent fall in Hong Kong's stock market this year could knock 1 per cent off Hong Kong's gross domestic product over the next year as consumers snap shut their purses, according to JP Morgan.

Economist Joan Zheng made the estimate after examining how the negative wealth effect of battered shareholdings changed consumer spending patterns.

The Government recently projected that GDP growth for this year will come in at slightly less than 1 per cent.

Ms Zheng said, however, that Hong Kong consumers were less sensitive to stock price swings than in the past because retail participation in the market had been trending downwards.

'The correlation between the Hang Seng Index and private consumption started to loosen in late 1999 and has broken down over the past two quarters,' Ms Zheng wrote in a note to clients this week.

'This is because recently the effect of falling stock prices on consumer spending has been outweighed by the [United States Federal Reserve's] dramatic [interest] rate cuts as well as by falls in the prices of luxury goods and increased tourist arrivals from China.'

The mainland economy is less sensitive to stock market movements as equity investment as a means of wealth preservation is still insignificant.

Also, the free float portion of market capitalisation is still tiny - 18 per cent of GDP in China compared to 201 per cent in Hong Kong and 145 per cent in the United States.

Ms Zheng came up with her estimates by localising the Fed rule of thumb for the US that a 20 per cent drop in equity prices is likely to take 1 per cent off real GDP growth in one year.

She adjusted the formula by accounting for market free float, the level of affluence, the rich-poor gap and retail participation.

Besides Hong Kong and China, she also applied the model to Taiwan.

The mainland and Taiwan are projected to make just a 0.2 per cent difference in their real GDP growth.

'Results suggest that to prompt a 1 per cent reduction in real GDP growth within one year, it would take a 45 per cent fall in equity prices in the case of China, 30 per cent in Taiwan and 25 per cent in Hong Kong,' Ms Zheng said.

Graphic: hsi06gbz