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WHY THE CURRENCY WAR ISN'T OVER IN HONG KONGThe speculative winds came late to Hong Kong, but when they arrived on Oct. 20, they hit like a typhoon. Finally faced with the same currency pressures battering the rest of Southeast Asia, the territory's financial markets felt the pain immediately. As interest rates soared in defense of the local dollar, the hectic Hong Kong stock market, heavily weighted toward financial and property companies, dropped by nearly a third--its steepest decline since 1989. The storm abated with the Hang Seng index's dramatic rally on Oct. 29. But don't think typhoon season is over. Speculators will keep testing the policy that Hong Kong and China can and should maintain two separate currencies now that their economies are more closely meshed than ever. Foreign-exchange traders are asking if Hong Kong will have to link its dollar to the Chinese renminbi instead of the U.S. greenback. They want a devaluation of the Hong Kong dollar to nudge it closer to the renminbi's level, especially since the plunge of every other currency in the region has highlighted the steep cost of doing business in the former British territory. DOOMSDAY. Hong Kong and Beijing authorities are aghast at the very suggestion of a devaluation--and they have $200 billion in combined reserves to bolster their position. They envision a day when the Chinese economy is so strong that the renminbi becomes convertible and the two currencies merge. And through the summer, business executives in Hong Kong were suggesting that the monetary authorities would gradually and quietly loosen the peg to the greenback in 1998 to give Hong Kong a competitive lift. Yet authorities don't want a full-blown merger of the currencies to occur for years. China and Hong Kong have everything to lose from a sudden, steep devaluation of the Hong Kong dollar. Local executives and market players paint a convincing doomsday scenario of plummeting confidence, political crisis, and capital flight. To the Chinese authorities who engineered the handover, such turmoil would be a major embarrassment and a setback to their plans to raise badly needed capital for Chinese companies on the Hong Kong market. And a devaluation may not help Hong Kong's service economy as much as it may in Thailand, for example, which is dependent on cheap exports of manufactured goods for its survival. No wonder the authorities have defended the dollar with such ferocity, spending heavily to buy the currency and at one point pushing overnight interbank loan rates up to 300%. But a prolonged defense will cause a lot of collateral damage as interest rates stay high. The chief casualty: real estate. Analysts estimate that residential real estate prices could drop anywhere from 20% to 40% over the next three months. Given that 43% of total bank loans go to the property sector, a burst in the bubble heightens the risks for Hong Kong's lenders. Ordinary folk, whose wealth is mostly based on the apartments they own, won't be able to escape the carnage either. Because Hong Kong residents spend up to 60% of their income on mortgages, any spike in interest rates could devour household finances. SCREECHING HALT. ''Consumption will come to a screeching halt,'' predicts Enzio von Pfeil, chief economist for Clarion Securities. ''People don't spend if interest rates are high and they're worried about their jobs.'' Geoffrey Barker, regional strategist for Schroder Securities Ltd. in Hong Kong, expects economic weakness to begin pushing wages down and unemployment up within 6 to 12 months. Whatever happens, Hong Kong has to get its costs down. ''The increase in costs has made Hong Kong much less attractive as a shopping haven,'' laments Peter Lau, chairman and chief executive of Giordano International Ltd., an apparel chain. Richard L. Miskewicz, a consultant for A.T. Kearney, says handling fees for a 40-foot shipping container run to $1,000 in Hong Kong, compared with $80 in Shanghai. ''Hong Kong needs to improve its competitiveness or it will lose traffic,'' he says. This wasn't the way the handover was supposed to unfold. The Chinese connection was supposed to generate confidence, not doubt, about the stability of the Hong Kong dollar and Hong Kong's role in Asia's boom. But in today's global economy, traders follow their own script--and force even the best policymakers to make painful choices.
By Joyce Barnathan with Miguella Lam in Hong Kong RELATED ITEMS
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Updated Oct. 30, 1997 by bwwebmaster
Copyright 1997, by The McGraw-Hill Companies Inc. All rights reserved.
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