Asia’s Economic Turmoil Hitting Hong Kong

Asia’s economic crisis has finally reached Hong Kong, the tiny former colony and international trading center that to outsiders has seemed a relatively tranquil financial outpost over the last year.

In a warning that sent stocks plunging 5.3% on Wednesday, Chief Executive Tung Chee-hwa said Hong Kong’s once-vibrant economy has hit its lowest growth in 13 years and may be headed for a prolonged recession.

“We are now in the depth of a major economic adjustment, the result of which may be prolonged and painful to everyone,” Tung said at a reception at the Foreign Correspondents’ Club. “The growth of the economy will fall substantially and indeed may even be negative.”

His words were interpreted as a warning that Hong Kong’s gross domestic product figures due out Friday will reveal negative growth for the first time since 1985. But the signs of recession have become obvious.

Many of the real estate agencies that lined the streets have transformed into laundries or noodle shops; those still open plaster their windows with apartments for sale--30% off.

One agent offered a free car with every flat purchased. Shoppers have stopped splurging, and retail sales have dropped 14%. A downtown boutique that housed Gucci, Versace and Prada shut down to move to cheaper space. Unemployment has reached a new high of 3.9%.

Even so, Hong Kong, with its strong banking system and team of economic czars, has borne up better than most of its Asian neighbors during the economic crisis that has drained the region in the last year. The territory successfully repelled attacks on the Hong Kong dollar by speculators who triggered devaluations in Thailand and Indonesia in 1997.

But the last decade of double-digit growth, which piggybacked in part on China’s rapid development, inflated prices of stocks and property. Regional devaluation and fleeing foreign investors caused Hong Kong’s bubble to finally pop.

Hong Kong Financial Secretary Donald Tsang acknowledged that the territory is at a turning point, but tried to be reassuring.

“The problem we face is not created by Hong Kong. It is something which happened in the rest of the world and has since spread to Hong Kong, and we are the least affected so far. We have to face the period of adjustment, which will be rather painful. And I am quite sure that Hong Kong people are well-equipped to deal with that.”

Economists here cautioned that the downturn was more than a temporary dip.

“This is not just an economic cycle, this is a paradigm shift,” said Andy Xie, a senior economist at Morgan Stanley. Hong Kong’s growth was driven by an asset bubble, he said, and now that those artificially inflated prices are spiraling back down to Earth, Hong Kong must return to the basics to revive the economy.

Economists have suggested cutting taxes, boosting infrastructure projects and refocusing on services, especially for China, as ways of stimulating growth. The Hong Kong government announced a jobs task force and may disclose new economic policies Friday along with the GDP figures.

The Asian crisis has dampened Chinese growth as well. About 75% of foreign direct investment on the mainland comes from overseas Chinese, who now have less money to spend. China has seen the benefits of its own devaluation in 1994 erode as rival Southeast Asian exporters’ currencies have plunged, making their goods much cheaper.

But China has resisted the temptation to devalue the yuan again, which might unleash another chaotic round of currency crisis.

Chinese Finance Minister Xiang Huaicheng said Wednesday in Washington that the Asian crisis put the Chinese economy under “enormous pressure,” but he vowed to maintain a stable exchange rate for the currency.

Fortunately for Hong Kong and other Asian economies, the United States and Europe are strong and so far have maintained large appetites for Asian goods.

“What has really saved Asia from a worse plight,” said Ken Davies, chief analyst at the Economist Intelligence Unit, “is that Western economies have been so healthy.”

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Here We Go Again?

Wall Street and stock markets worldwide were hammered early Wednesday as economic and financial turmoil in Russia, South Korea and Hong Kong darkened investors’ collective mood. It’s the third such emerging-market-triggered stock swoon in eight months. The Dow Jones industrial average’s trend since Sept. 1, and details on the three market crises:

October: East Asia’s financial crisis explodes as currencies and stocks plunge. Rumors that Hong Kong might devaluate trigger a 554-point, 7.2% drop in Dow index on Oct. 27, to 7,161. But the Dow moves back above 8,000 by early-December, supported by falling bond yields.

January: Indonesia’s crumbling economy triggers currency meltdown, dragging other Asian markets lower again. The Dow slides 222 points, or 2.8%, to 7,580 on Jan. 9. But strong fourth-quarter profit reports quickly help lift market, as Asia appears to stabilize.

Now: Dow falls 175 points, or 1.9%, early Wednesday, responding in part to plummeting markets in Russia, Asia and Latin America on new economic worries. Dow recovers to close off just 27.16 points, at 8,936.57. But the broader U.S. market has been waning since April 22, as investors worry about corporate profit growth amid weak economies overseas and a strong dollar.

Source: Bloomberg News, Times research.