| BUSINESSWEEK ONLINE : JUNE 21, 1999 ISSUE | ||||||||
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| BUSINESS OUTLOOK
Hong Kong: Quaking before the Fed No place has more to fear from every twitch of U.S. monetary policy than Hong Kong. Its currency is rigidly pegged to the U.S. dollar, and when U.S. interest rates go up, Hong Kong's must follow. With the economy in its worst recession in half a century, Hong Kong can ill afford higher rates, although the Federal Reserve is now leaning in that direction. Hong Kong was one of the last places to succumb to the Asian crisis, but it may be one of the last to revive if it can't cut rates. The currency peg led to a huge asset bubble in the mid-1990s, because Hong Kong couldn't raise rates to cool off its booming economy. Then, after Asia went under in 1997 and speculators tried to break the peg, rates spiked into double-digit territory on several occasions, once hitting 280% in October, 1997. Rates more than doubled last August, to 19%. The peg has held, but at a high cost. The economy contracted 5.1% in 1998, and analysts expect no growth in 1999. Government pump-priming is providing some stimulus, now that the government is running a rare budget deficit. Still, unemployment recently hit a record 6.3%, and it's expected to keep climbing. The grinding process of deflation continues. Property prices are down about 50% from their mid-1997 peak, although they show signs of stabilizing. And the government expects consumer prices to fall 2.5% for all of 1999. Until last year, inflation was in the high single digits for more than a decade. Now, businesses and consumers must adjust to a tough new reality of steep real interest rates of more than 8%. Thirty-day interbank rates are 5.5%, having edged up nearly a half-point since the Fed announced that it was biased in favor of lifting rates. Rates are about two full points below their January high. That drop, plus improved investor sentiment, has sent the benchmark Hang Seng stock index up 86% from last summer's low. But that's 26% below its August, 1997, peak, and higher interest rates could knock that recovery off track. By Mark Clifford in Hong Kong _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ BACK TO TOP |
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