(Updates with economist’s comment in fourth paragraph)
Nov. 9 (Bloomberg) -- Hong Kong Chief Executive Donald Tsang said the city’s economy may have slipped into a recession in the third quarter as Europe’s debt crisis roiled markets.
Growth may be as little as 2 percent next year after a likely expansion of 5 percent this year, Tsang said in an interview at Bloomberg LP’s head office in New York yesterday. That would compare with a 7 percent expansion last year.
Hong Kong exports declined in September for the first time in almost two years, and the benchmark Hang Seng Index plunged 21 percent in the third quarter. Third-quarter economic figures are due Nov. 11, with seven of 15 economists in a Bloomberg News survey forecasting a second straight contraction, meeting the technical definition of a recession.
“It’s very likely Hong Kong has entered into a recession, and I doubt if that will be a brief one,” said Law Ka Chung, chief economist at Bank of Communications Co. Ltd. in Hong Kong. “There are so many bombs in Europe waiting to explode and the impact on the global economy may be huge, similar to what we saw in late 2008.”
Europe’s crisis and elevated U.S. unemployment have sapped demand for Asian exports, contributing to an easing in economic growth in nations from China to South Korea. Taiwan’s economy shrank 0.28 percent in the third quarter from the previous three months, the first contraction since 2009, a government report showed Oct. 31. Hong Kong’s second-quarter decline was 0.5 percent.
“I am pessimistic about short-term global growth,” said Tsang, 67. “I am afraid a major eruption in the largest market in the world, i.e. Europe, is going to affect everyone on earth and Hong Kong cannot be totally exempted,” he said, adding that while a full-year recession is very unlikely, it’s “possible” to have “a couple of quarters of bad times.”
Besides weakness in global trade, Hong Kong is grappling with elevated inflation and the risk of a slumping housing market. Shares of Sun Hung Kai Properties Ltd., the world’s biggest developer by market value, fell 18 percent this year, worse than a 15 percent slide in the benchmark index.
The city won’t relax housing curbs, Tsang said, adding that prices will moderate over time and the market “will not totally collapse.”
A career civil servant who was previously the city’s financial and chief secretary, Tsang will step down as chief executive in June after more than seven years in office. Under his watch, the economy grew 26 percent and unemployment fell to a 13-year low as Hong Kong’s proximity to China boosted exports, retail spending and services.
Economic growth in China and Hong Kong’s fiscal surplus, enough to fund two years of operations with no revenue, will help the city weather the global slowdown, Tsang said.
Chinese Vice Premier Li Keqiang, in a visit to Hong Kong in August, announced plans to encourage more two-way investment in stock markets to help support the city’s economy. Hong Kong is also seeking to become the offshore center for the Chinese currency to cement its status as Asia’s major financial hub.
About 8 percent of China’s foreign trade is conducted in yuan, with the majority of that settled in Hong Kong, Tsang said. Yuan trade settlement in Hong Kong may reach 1.5 trillion yuan ($237 billion) by the end of this year, he said.
At an event in New York Nov. 7, Tsang reiterated that his government is committed to retaining the Hong Kong dollar’s fixed link to the U.S. currency, defying speculators who bet against the peg.
“We want a stable currency,” Tsang said Nov. 7. “I am sure the market speculators want us to change and remove the peg; I am sorry, we are going to disappoint you. We won’t do that. It will stay this way.”
Hong Kong’s policy makers have kept its currency at about HK$7.80 per dollar since 1983, giving up the power to set monetary policy independently. William Ackman, founder of hedge fund Pershing Square Capital Management LP, said in September that he’s using options to wager that Hong Kong will allow its currency to appreciate because the peg stokes inflation.
Consumer prices rose 7.9 percent in July, the fastest pace since 1995. Inflation slowed to 5.8 percent in September.
Rising consumer prices are a global phenomenon that has less to do with the currency peg, Tsang said Nov. 7. Hong Kong will maintain the link at least until the yuan becomes fully convertible, “which won’t be tomorrow,” Tsang said.
--Editors: Hwee Ann Tan, Paul Panckhurst
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