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IS HONG KONG A FREE MARKET? (int'l edition)Cartels and cozy government deals finally wreak havocThe Hong Kong government has stopped buying stocks to prop up the local market. Implausibly, it has even declared victory, despite the damage to Hong Kong's reputation, saying its intervention foiled speculators. But the central problem remains: The economy is perilously dependent on overpriced real estate. The government can step back and let the real estate market find its own bottom--even though that process will badly damage major property companies and wipe out the equity of hundreds of thousands of homeowners. Or it can keep intervening to protect the banks and developers--and probably just postpone the inevitable. It's a hard choice. The economy is contracting at a 4% rate. In the process, Hong Kong property values have declined nearly $250 billion since their peak last September, estimates SG Securities (Hong Kong) Ltd. analyst Alan Dalgleish. Share prices have lost $300 billion in value. And there's more pain to come. Property values could tumble as much as 50% from current levels, while stock prices probably have 20% more downside. ''We haven't reached the bottom,'' says property consultancy First Pacific Davies Ltd. Research Director Simon Smith. That leaves banks, which have 44% of their loans in real estate, still perilously exposed. High interest rates, which rose to 12.33% for short-term loans at the end of August, from 7.36% a year earlier, are squeezing both banks and borrowers. And borrowing costs will be pushed higher yet by Standard & Poor's downgrade of Hong Kong's sovereign credit rating on Aug. 31, along with those of some blue-chip institutions. The real estate crash is a humbling experience. In early 1997, New World Development Co. set a record with its $92 million purchase of a home atop Hong Kong Island for redevelopment. That house would be lucky to fetch half as much today, property analysts say. CARTELS RULE. These woes reveal the deceptive nature of the Hong Kong economy. Although it has many features of a free market, its power center is a group of cartels. Bankers set key interest rates among themselves. A small band of property developers divided most of the spoils during the price runup from 1986 until 1997. Pegging the currency to the U.S. dollar fueled the boom by keeping financing costs low. And companies from bus lines to electricity producers, through cozy deals with the government, have kept prices high. But now, with the economy slowing and rates spiking, the game is over. Instead of lashing out at speculators, the government would do better to make Hong Kong more competitive and productive. One way to do that would be to set up a Western-style antimonopoly commission. In a freer economy, with the cartels curbed, the bloated real estate sector will shrink to its proper size.
By Mark L. Clifford in Hong Kong RELATED ITEMS
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Updated Sept. 3, 1998 by bwwebmaster
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