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Thursday, December 8, 2016, 23:33

HK must brace for challenges posed by external events

By Peter Liang

Investors are trying to digest a lot of global economic news that could have profound implications for the externally oriented Hong Kong economy and other regional economies and their asset markets.

All at once, Hong Kong faces a sharp turn of events manifested in rising interest rates, an appreciating US dollar, emerging trade protectionism and the leveling-off of domestic investments.

Of primary concern to investors in Hong Kong stocks and properties is, of course, borrowing cost, which is widely expected to go up. The question is how quickly and often interest rates will increase in 2017.

By some estimates, which are largely based on US president-elect Donald Trump’s inflationary economic policies, interest rates in the US can go up to as high as 6 percent by 2018. Hong Kong will have no choice but to raise its rates also in order to preserve the linked exchange rate system.

Such a huge jump in the cost of funds within a relatively short period of time would almost certainly send the local stock and property markets into a tailspin.

The prospect of rising interest rates, combined with a strong performance by the US economy, has already pushed up the value of the US dollar against most other world major currencies. The strong dollar is expected to become a permanent feature in global economics. It will have a far-reaching impact on Hong Kong.

In the past several decades, Hong Kong and many other regional economies were tuned to a weak dollar and an explosive growth in exports to the developed economies in North America and Europe. Although demands in Western markets have declined since the outbreak of the credit crisis in 2007, which plunged the developed economies into a deep recession, Asian emerging markets could take advantage of exceptionally low funding cost to help boost economic growth by stepping up domestic investment in infrastructure and other public works projects.

An expansive budgetary policy has enabled the externally oriented Hong Kong economy to maintain economic growth, albeit at a more moderate rate than before, throughout the global recession years. During that time, the depreciation of the local currency in tandem with the US dollar, together with stagnant wages, had attracted a large flow of incoming tourists, especially from the Chinese mainland.

The subsequent increase in tourist spending has brought unprecedented prosperity to the retail and catering sectors, which are two of the city’s largest employers. Indeed, Hong Kong was fully justified in congratulating itself for doing reasonably well with virtually full employment while most other developed economies were struggling to climb out of the recession pit.

But things are fast changing. The strengthening of the Hong Kong dollar against most other regional currencies is posing a serious threat to the city’s competitiveness as a financial and trade service provider and a tourist destination.

Moreover, nearly all the major infrastructure projects are either completed or near completion. Work on the multi-billion-dollar airport third runway has yet to begin. It will take years before the expenditure on this mega project will make an appreciable impact on the economy.

Some economists are forecasting at least several lean years ahead when the economy is expected to grow at an anemic 1 to 1.5 percent a year.

More troubling for the export-driven economies of this region is the rising tide of protectionism in the US and Europe. Anti-globalization rhetoric is seen to have helped Trump win the US presidential election. Public opinion seems to favor hard-line candidates for the top posts in several major European countries in the 2017 elections.

In Hong Kong, the government has emphasized that innovation is the key to the city’s economic future. It is also hard at work exploring opportunities that can help diversify the economy, which is regarded as being overly dependent on finance and property.

Before such efforts can bear fruit, Hong Kong will have to rely on its strong financial structure to keep itself on an even keel at the onset of the economic storm. The integrity of the financial system is expected to face its severest test since the outbreak of the Asian financial crisis in 1997.

The pressing question is how to help small- to medium-sized businesses cope with the fast-changing and often perplexing global economic climate. Most of them are not well prepared for this totally new ball game. It is a question that Financial Secretary John Tsang Chun-wah will have to address in his budget for the next fiscal year.

The author is a veteran current affairs commentator.

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