HONG KONG 'RECOVERY'
Part 2: Post-SARS rebound runs out of steam
By Alan C Fung

Part 1: Good stats, but people can't eat stats

HONG KONG - Starting in the second half of 2003, Hong Kong's stock market rose sharply from the lows it hit during the severe acute respiratory syndrome (SARS) outbreak earlier in the year. The property market also boomed after SARS. Hong Kong's government says those factors will drive a strong economic rebound this year. But alarm signals indicate the recovery may already be out of steam.

During the post-SARS period, the stock market's Hang Seng Index rose from the 8,000 level to peak above 14,000 on March 1, gaining more than 60 percent. Market daily turnover rose from lows of HK$8 billion (US$1.03 billion) to more than HK$20 billion. Many retail investors resumed trading. Crowds once again collected outside banks and securities companies, and newspapers and financial magazines wrote of making easy fortunes overnight. This renewed activity was apparently concrete evidence of economic rebound.

Or maybe it was a concrete balloon. The stock market has taken a double-digit plunge since March. From its high of 14,058, the Hang Seng Index closed below 11,000 on May 17, a dive of 22 percent. It closed on Tuesday at 11,692, still down 16.8 percent from the March 1 high.

Beijing policies to blame?
Analysts are divided on the reasons for the slump. Some say it is a natural adjustment after the market's heady climb. Others pin the decline on mainland China's measures to curb growth in its own overheating economy, and/or the political dispute with the leadership in Beijing over the expansion of democracy in Hong Kong.

"The rise in the stock market starting in mid-2003 was largely because the market was seriously oversold during the SARS period," analyst Mavis Leong of Tung Fai Securities says. "Gifts given by the Beijing government such as CEPA [the Closer Economic Partnership Arrangement] and the Individual Tourists Scheme also contributed [to the rise], since they promoted positive expectations for the stock market.

"Now stock prices have dropped because the market has corrected the overselling, and the impact of those favorable policies carried out by Beijing is proving to be overestimated," Leong concludes. "For instance, the hottest concept stocks, stimulated by CEPA and the Individual Tourists Scheme, have fallen from unreasonably high prices."

Property pillar quakes
Like the stock market, the property market roared ahead late last year. Sales rose 140 percent in the fourth quarter of 2003 compared to the SARS period. Prices of some estates and deluxe properties (defined as 1,000 square feet or larger) rose 30 percent. Speculators reappeared. The influx of mainland tourists stimulated visions of big spenders in the market. Asking prices of some new deluxe properties reached HK$15,000 ($1,928) per square foot. It seemed the property market had recovered.

But as with the stock pillar of Hong Kong's recovery, fissures in the property pillar have also appeared. According to figures provided by the HK Land Registry Department, property market turnover fell 18.3 percent in April compared with March. The Centaline Property Agency reported only 205 sales of new deluxe properties, down 52.2 percent from March, valued at HK$4.2 billion, down 31.6 percent. Ricacop Properties in Stanley reported only 16 deals during April in Island South - the deluxe property heartland - a 70 percent drop from March.

Many insiders and analysts acknowledge speculation and unsustainable price rises in the market, but they claim the April figures are an adjustment period in a positive market. That begs the question of why a healthy market coming out of a six-year crisis needs an adjustment after just six months of growth.

One key problem for property, as well as the vital retail sector, is the lack of significant improvement in both the unemployment rate and the wage rate. Without gains in these areas, it will be difficult for Hong Kong's economy to make a sustained recovery.

Rising rates
Apart from that, sooner or later (probably sooner) the United States will increase its interest rates, and Hong Kong will have to follow along due to its currency peg to the US dollar. Higher rates will be bad for both the stock and property markets.

The political outlook also is not encouraging. Standard & Poor's reiterated its 18-month-old negative currency rating outlook for Hong Kong due to political uncertainties. Hong Kong Chief Executive Tung Chee-hwa calls the S&P rating an "amber light" for Hong Kong that demands attention.

Though the economy in Hong Kong has strengthened since SARS, S&P Sovereign and International Public Finance Ratings director Ping Chew believes that the intervention of the Beijing government in local political reform will hinder the Hong Kong government. Public discontent may lead to opposition candidates gaining seats in September's Legislative Council election.

A revitalized opposition might prevent Tung's government from enacting economic measures such as the levying of a sales tax on all consumer goods or loosening the currency peg. Either proposal would represent a radical step for Hong Kong, but neither has been adopted by the government so far, and there is no sign that these measures will be adopted in the near future.

Moreover, the failure of rising stock and property markets for the past year to produce a sustainable recovery may indicate that nothing short of radical measures will make Hong Kong's economy blossom again.

•  This concludes the two parts on Hong Kong's economy.

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