Hong Kong Under Stress From Weaker Asian Markets
by Edward A. Gargan
HONG KONG -- Leung Pak Lau thought life was
pretty good. Then, Asia's economic and financial wreckage
collapsed on his red and silver taxicab.
A slight man in his mid-50s, Leung owns his own cab -- a fervent aspiration once, but now a choice he rues.
"Business is definitely bad these days," he said, piloting his stick-shift Toyota through the clotted streets of the Wanchai shopping district. What upsets him most is that when he bought his taxi license five months ago, he says, it cost $3.1 million (Hong Kong), or $397,000 . "Now it's only worth about $2 million" (Hong Kong) or $256,000 .
Shored up by hefty budget and trade surpluses, and $92.8 billion in foreign exchange reserves, Hong Kong's economy has proved more robust than the economies of its neighbors. Its companies have comparatively small debt loads, and there are no empty office towers. But the ripples of the region's distress are nevertheless lapping at the shores of Hong Kong harbor.
Already, a major investment bank and a small brokerage firm have gone under. Retailers are hurting; unemployment is rising, and real estate development, long a pillar of the economy, is slowing. Though some of these problems are a result of the regional collapse, Hong Kong is being buffeted primarily by a problem of its own making: the territory's monetary policy.
Unlike other countries in the region, the Hong Kong dollar is rigidly pegged to the U.S. dollar at 7.8-to-1, a link that has forestalled currency instability here but has also begun to rattle some sectors of the economy. Even Tung Chee-hwa, the man chosen by Beijing as Hong Kong's chief executive, acknowledges that maintaining the link is causing problems.
"In the course of defending the linked exchange-rate system," Tung, a former shipping entrepreneur, told the territory's Beijing-picked legislature two weeks ago, the following situations will undoubtedly arise: the "Hong Kong dollar interest rate goes up; property prices come down; the stock market lingers at low levels; our tourism is in the doldrums; consumer spending sentiment diminishes; our economic growth in 1998 will slow down significantly and our unemployment figures will be on the rise."
Nonetheless, Tung has repeatedly declared that the link with the U.S. dollar will be maintained at all costs. "It is vital for us to defend the linked exchange rate," Tung told legislators. "This is a basic policy to maintain the economic stability and prosperity of Hong Kong."
Likewise, China's deputy prime minister, Zhu Rongji, widely seen as the country's next prime minister, has told visiting officials that Beijing will defend not only the value of the yuan, China's currency, but also Hong Kong's decision to preserve its peg to the U.S. dollar as well.
Although no one is talking about any alternative monetary policies, the ramifications of keeping the peg are evident in the domestic economy.
Mortgage interest rates have already touched 12 percent, making monthly payments more expensive, depressing property prices, raising costs for retailers, dampening the stock market -- even undermining the value of taxicab licenses, which are usually bought with bank loans that now carry sharply higher rates.
Not only has Leung's cab license slumped in value, but Hong Kong's famously, and many say ridiculously, high-priced real estate is taking a battering in the face of mounting interest rates. With prices now 20 to 30 percent below peaks of barely three months ago, several high-profile companies' debt levels are stirring anxieties in the stock market, where property and development companies are pillars of the 33-stock benchmark Hang Seng index.
One of the territory's largest real estate developers, Sun Hung Kai Properties, has announced that it is halting work on 10 of its construction projects because of the current economic climate. And as the economy begins to contract -- the government predicts a growth rate this year of 4 percent, down from 5.5 percent last year, and private analysts are more pessimistic -- a growing number of investment banks and brokerage houses are cutting jobs that were added during the boom years.
The brashest and newest of the breed, Peregrine Investments Holdings, collapsed this month. Apart from that failure, BZW Asia has disappeared after being acquired by Credit Suisse First Boston; Schroders Securities Asia Ltd. laid off 220 employees here after it shut most of its brokerage business, and Socgen-Crosby, another investment bank, has laid off employees and cut the salaries of senior executives.
On Jan. 19, a small mom-and-pop brokerage firm, Capital Asia Pacific Ltd., filed for bankruptcy, endangering the life savings of hundreds of investors, 300 of whom who besieged government offices for three days seeking some sort of rescue. Tung, who met the investors, said, "I am sympathetic for them and believe they deserve help." After a week of silence, the government announced a rescue package for smaller investors.
Other businesses are feeling pain as well. Hong Kong's airline, Cathay Pacific, badly bruised from vast rows of empty seats on its flights around Asia, has begun shedding workers around the region, starting last week with 750, of whom 220 will be laid off here in Hong Kong.
Along Hong Kong's shopping thoroughfares, the mood is increasingly gloomy. In the mannequin-filled window of the World Signs, a women's clothing store in Causeway Bay, a huge sign blares: "Up to 70 percent off." And this before the Chinese New Year, after which the big sales are supposed to happen.
"People don't seem to care about shopping," said Alice Liu, the shop's manager. "They used to buy new clothes for the holidays, for Christmas and Chinese New Year, but this year it really doesn't matter. People can go without new clothes."
The situation has become so bad that Hong Kong's retail industry has called on landlords to cut rents by 40 percent. "The retailers in Hong Kong are having an extremely difficult time," said Philip Ma, the chairman of the Hong Kong Retail Management Association, a group that represents businesses employing more than half of the industry's 200,000 workers.
So far, none of Hong Kong's major landlords have responded to Ma's plea. However, the Hong Kong Housing Authority announced that it was freezing rents on commercial establishments in public buildings.
Public confidence in the economy is at a two-year low, according to Ming Pao, a leading Chinese daily, which conducts quarterly surveys of public opinion. "Economic confidence has fallen to the level of 1995," the paper reported recently, "when China and Britain were in the midst of severe political conflict."
Despite rising public anxieties, however, most Hong Kong companies are not deeply enmeshed with the Southeast Asian economies; China is Hong Kong's backyard, and that is where most companies have invested. "Most Hong Kong companies have their operations, their manufacturing facilities, in China rather than Southeast Asia," said Richard Margolis, a first vice president at Merrill Lynch (Asia Pacific). "They just don't have the exposure, and that includes Hong Kong's banks."
And then there is tourism, which once helped fuel Hong Kong's economy as hordes of visitors deluged every shop from China Arts and Crafts to Gucci to the night markets of Kowloon. Although official data are lagging behind, figures for November show a 22 percent decline in tourist arrivals over November 1996.
That figure seems destined to deteriorate further when data arrive for December and January; both months have been battered by news of the deadly "bird flu" and the continuing regional meltdown. The government estimates that 8 percent of the territory's gross domestic product is derived from tourism and that 360,000 people work in tourist-related businesses. All that is jeopardized now.
Copyright (c) 1998 by The New York Times Co. Reprinted by permission