Hong Kong’s strong institutional framework, location and flexible workforce have positioned it as an ideal place to do business in Asia, particularly as an entry into mainland China. These factors will ensure Hong Kong continues to experience a high potential growth rate, belying its status as a developed economy. However, this will be of little comfort at present. As one of the most ‘open’ economies in the world, focused on finance and trade services, the global financial crisis is hitting Hong Kong hard.
Financial markets have been battered. Hong Kong’s lending markets have not been immune to the ructions in global capital markets. There was even a run on the Bank of East Asia on rumours of liquidity problems and large losses on international exposures. Assets prices have also fallen sharply. The Hang Seng Index has halved, while property prices are reversing, falling by 12 per cent in the last quarter of 2008. The authorities have been quick to limit the financial contagion, boosting liquidity in the financial system, placing a two-year guarantee on bank deposits and establishing a contingent bank capital facility.
While these policies have calmed the financial market, the effects on the ‘real’ economy are only just beginning. GDP fell by two per cent in the final quarter of 2008, its third consecutive quarterly decline, to be 2.5 per cent lower over the year. With more recent economic releases remaining downbeat, the economy is expected to contract a further two to three per cent this year – Hong Kong’s worse performance since the 1997-98 Asian financial crisis.Enjoying this article? Click here to subscribe for full access. Just $5 a month.
No sector of the economy will be immune, with exports, investment and private consumption all expected to fall further. Worse, downside risks dominate the outlook, with prospects for a turnaround hinging on a rebound in global activity. Even the most optimistic forecasters believe this will not occur until late 2009 at the earliest.
A systemic crisis is unlikely, however. Despite the uncertain global outlook, Hong Kong should weather the current storm better than the Asian financial crisis. Unlike in 1997, the economy has no major economic or financial imbalances. Households are not overgeared, while the banking sector is well capitalised, enabling it to withstand declining credit quality and falling asset prices. Extensive stress testing by the Hong Kong Monetary Authority confirms this.
The government balance sheet is also strong, enabling it to implement a sizeable fiscal stimulus. Even better, the ultra-loose monetary policy in the US is flowing into the territory through the linked exchange rate. Growth in China, where there are already some preliminary signs of stabilisation, should also provide a buffer. Hong Kong can also expect more ‘official’ support from Beijing to help it through the downturn, for political as much as economic reasons.