Hong Kong's secret strength

[Dennis R Redmond]

On Sat, 1 Aug 1998, Chris Burford wrote:

> The reason therefore why the Hong Kong dollar and the economy is steady
> when countries varying from Indonesia to Japan are buckling, is because of
> the fundamentals. 

True, but those fundamentals are looking weaker and weaker as we speak. HK
GDP growth is down to 2% or so, from an average of 6-8% in the 1990s; loan
growth has slowed dramatically, as has overall bank lending since the
1995-97 period. This doesn't mean HK is doomed (for one thing, real
interest rates are still pretty low), but you'll note that 
Singapore, a city-state at least as competitive as HK, has
allowed its currency to depreciate 20% over the past year, and Singapore
is consequently growing faster than HK, so those high interest rates are
starting to bite. If mainland China goes into recession, HK will probably
have to scrap the dollar peg.

One historical note here: HK's dollar-based exchange system was actually
put into practice only in 1983. Before that, the HK$ was linked to the
British pound sterling, whose decline nicely helped out HK exporters;
during the Seventies, the HK$ was free-floating, and depreciated from 4 to
the US dollar to around 9 to the buck. It was only when Deng unleashed the
mainland's export drive in the late Seventies that HK turned into a
financial metropole, and consequently adopted the dollar peg.

> Hong Kong for a city state of 6 million has massive reserves of the 
> order of $30 billion

HK's bankers say forex reserves are around $80 billion, which confirms 
your point.

> Thus even this year the new governor has announced the building of 87
> thousand dwellings a year. This is a massive countercyclical intervention
> in the economy, when you compare the fact that the rate of new houses in
> England with ten times the population is of the order of 150 thousand a
> year only.

Yes, and the monetary authorities are also, interestingly enough, pushing
for more mortgage lending for local residents; evidently the idea is to
offset declining Asia investments with homegrown investment, a smart
move. HK is becoming a consumer society just like the rest of the
First World. Check out this interesting tidbit from the Hong Kong Monetary
Authority's website (www.info.gov.hk/hkma, under "Monetary System"):

"In managing the Exchange Fund, the HKMA employs an internal management
team as well as a group of external fund managers. About three quarters of
the assets of the Exchange Fund are managed internally, with
the remaining one quarter managed by the external managers. The HKMA
continues to strengthen both the depth and breadth of its internal
management and to upgrade the utilization of its external managers.

The internal management of the assets of the Exchange Fund is conducted by
HKMA's Direct Investment Division, which invests the funds under its
management in three separate portfolios: a Hedging Portfolio
comprising of assets as a hedge against the interest-bearing liabilities
of the Fund; a Liquidity Portfolio of reserves to meet market operational
needs and an Investment Portfolio engaged in longer-term investments to
preserve the value of the Fund for the future benefit of the people of
Hong Kong."

Pretty interesting, eh? Sounds more like Singapore's managed markets than
the casino banking espoused by the neoliberals.

-- Dennis