Hong Kong's future role as a Far East economic powerhouse is under threat, the result of structural ...
Hong Kong's future role as a Far East economic powerhouse is under threat, the result of structural economic weakness and the rapid development of Guandong and Shenzen provinces on the Chinese mainland.
Hong Kong's manufacturers have been affected by the region's reunion with China. Production costs are lower and margins higher on the mainland and many businesses have relocated, sending unemployment rocketing.
Mike Hanbury-Williams, director of Pacific Basin equities at RSA Investments, says: 'Unemployment is now at 6.8% and this is having a major impact on the economy, particularly on property. Property is a important pointer to the overall health of the economy and consumer confidence because of the sector's importance to the ordinary man in the street.'
Property prices, he says, have collapsed by 65% from their peak a few years ago and land prices have fallen by 75%. It is now much cheaper to buy than to rent and the price of housing is actually the most attractive it has been for many years, adds Hanbury-Williams. With interest rates low, this would provide the stimulus for a property boom in many countries, but none has so far been forthcoming in Hong Kong. Nor does Hanbury-Williams expect to see one in the near future. 'Consumer confidence is low,' he says. 'Almost 15% of the market is currently in negative equity and if you include those who have lost all of their working capital, this figure rises to 50%.'
It is not just the property sector that is feeling the pain, he continues. Shops with permanent discounts of up to 70% are common and shoppers are still staying away. Another structural weakness he draws attention to is the currency's peg to the dollar. Although US interest rates are low, he thinks they are still too high for a Hong Kong economy, which is different to the US.
Harry Lewis, a fund manager with Old Mutual Asset Management, agrees the peg with the dollar is causing Hong Kong difficulties. Rates are being kept artificially high, he says, and Hong Kong is being crucified as a result. Not only does the semi-autonomous Chinese territory have structural weaknesses that is hampering it, but its raison d'etre is also disappearing.
Until recently, trade between the Republic of China and Taiwan was officially frowned on by both parties. To get round this Hong Kong was used as a transit point for goods traded between firms in China and in Taiwan.
However, beneath all the sabre-rattling that characterises the relationship between China and Taiwan, a quiet rapprochement has been taking place resulting in the Taiwanese government's announcement that direct trade with China is now permissable, a development that is hitting Hong Kong hard.
One area still doing well is financial services, in spite of the development of Shanghai as a regional financial services centre. Despite the low property prices available to skilled financial services workers in Shanghai, most ordinary Hong Kong Chinese have stayed on the island rather than move to the mainland.
'The difference is taxation and higher commuting costs mean it is not that beneficial to move right now. Shanghai is growing in importance but a lot of business is still going through Hong Kong and that will not change in the short term,' says Lewis.
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