37 Years of Growth End in Hong Kong

The Hong Kong economic miracle--four decades of uninterrupted growth--suffered a rare setback Friday as officials officially conceded that the Asian trading capital is in recession.

Financial Secretary Donald Tsang said Hong Kong’s gross domestic product in the second quarter fell by a steep 5% in real terms over the year before. He projected a 4% decline for the full year.

It was the second successive quarter of negative growth, confirming what struggling businesses and property owners had known for months: Hong Kong’s economy has gone into reverse and will test the resolve of its people in the months to come.

Meeting with reporters, government economist K.Y. Tang glumly predicted the slide would continue at least until the end of the year, resulting in the first annual decline in Hong Kong’s fortunes since at least 1961, when economic statistics were first published here.

One of the boilerplate items in speeches by Hong Kong’s last British governor, Chris Patten, was that Hong Kong’s industrious people had racked up “36 years of uninterrupted growth”--a record he claimed was unmatched anywhere else in the world.

The ongoing Asian financial crisis gets the blame, but the timing of the downturn coincides almost exactly with Hong Kong’s return to Chinese sovereignty in July 1997.

In the first four quarters under Chinese rule, the Hong Kong economy has grown by less than 1%. In addition, unemployment has risen to 4.8%, the highest since the 1970s oil crisis. Values of shares in the Hang Seng index on the Hong Kong stock exchange have fallen by more than half in the same period.

Ironically, China, whose leaders had long coveted Hong Kong’s vibrant economy and financial expertise, is expected to record a year-end positive growth rate at between 6% and 8%.

In its half-yearly economic report released Friday, Hong Kong said the second quarter economic contraction was “mainly due to a further slackening in both local consumer demand and export performance in the second quarter.”

The export decline stems from a collapse in demand for products in other Asian countries, notably Japan and South Korea.

The recent poor economic performance has shaken public confidence in Hong Kong’s leadership under Chief Executive Tung Chee-hwa, a shipping magnate who was Beijing’s handpicked choice to become Hong Kong’s first leader in the post-British era.

According to the Asia Commercial Research poll, public satisfaction with Tung has declined from nearly 90% approval in October 1997 to a low this month of just over 55%.

Foreign investment confidence has also suffered, particularly since the government began a massive intervention in the Hong Kong stock exchange on Aug. 14, ostensibly to root out “speculators” who officials said were attacking the Hong Kong currency.

On Friday, trading volume achieved an all-time record, more than half of which were government buys. Some estimates place the total government investment in the market at $11 billion, including more than $2 billion a day on Thursday and Friday.

Many foreign investment managers describe the move as dangerous, saying that it has seriously damaged Hong Kong’s reputation as a free market.

But financial secretary Tsang on Friday staunchly defended the intervention and insisted it was working.

“In the currency market,” Tsang said, “we have seen many speculators closing out their short positions, as a result of which the pressure on Hong Kong dollars has eased somewhat in the past few days.”

At stake is the so-called peg linking the Hong Kong dollar at a fixed exchange rate with the U.S. dollar. Functioning as a de facto currency exchange board, the Hong Kong Monetary Authority maintains the peg by selling U.S. dollars to the central bank or buying Hong Kong dollars, depending on which currency is under pressure.

These actions either expand or contract the Hong Kong monetary base, causing interest rates to rise and fall, often dramatically. When interest rates rise, the Hong Kong stock exchange often panics, producing a glitch in the system that officials say has been exploited by speculators.

But whatever direction stock prices are headed, the economy remains in trouble.

“From our perspective,” said Stanley Druckenmiller, a manager with currency trader George Soros’ Quantum Fund, during a Hong Kong television interview, “no matter what they do with the market, when they wake up on Monday morning they are still going to be in a recession.”