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In the 70’s and early
80’s, prior to the talks between Margaret Thatcher and Deng Xhao
Peng, concerning the end of the 99 year lease on the New Territories of
Hong Kong, the Hong Kong economy came close to collapse. Property prices
fell by up to 75% and the Hong Kong dollar was under constant pressure; the
government initially responded by increasing interest rates, which further
compounded the problem by reducing business confidence. Eventually the long
term fix was to initiate a ‘peg’, a fixed exchange rate to the
US dollar which was only allowed to fluctuate in a very narrow margin
around the base of Hong Kong $7.8 to 1US$.
This proved a stroke of genius, in terms of Government intervention in the
economy, and gradually confidence was restored. In the next few years
property prices boomed, interest rates fell, there was negative
unemployment and the Hang Seng index moved toward 5000 from less than 1000.
In October 1987 the bubble burst in stockmarkets around the world (with, at
that time, the exception of
Japan
) the Hang Seng collapsed property prices stabilised
and the economy sat back for a while and regrouped.
Over the next ten years, up to the hand over in June 1997, there was no
stopping the tide of profit. Defying all predictions the Hong Kong Hang
Seng Index reached its highest ever level of 16673 following the hand over
to the
Peoples
Republic
of
China
. Property prices reached all time highs, a parking
space in a multi-storey car park in Central sold for
Hong Kong
$ 1,000,000 – US $125,000! A four bedroom house on an estate in the
New
Territories
, which could have been bought for US $150,000, 15
years before, sold for US $3,000,000 and a house on the
Hong Kong
equivalent to
Mayfair
, The Peak would fetch enough to pay off the national
debt of most countries outside the G7. Much of this economic miracle was
attributable to that decision to peg the
Hong Kong
$ to the
US
$.
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In late 1997 following worries that the Chinese Government was to remove
the peg with the US $ pressure mounted on the exchange rate and the
Treasury had no choice but to increase interest rates in order to stem
speculation. This did indeed reduce the pressure on the
Hong Kong
$ but, in a replay of the events of the 80s, business confidence ebbed and
the Hang Seng Index fell to below 10000. Within a week the index was back
to 12000 and it looked like a blip.
A week or so ago the index dropped to 7500 and now hovers around 8500,
looking very shaky indeed, where other markets have picked up or are
looking happier. So where does
Hong
Kong
differ? In another
repeat of history, once again the answer lies in the exchange rate. The
worries that the PRC will remove the ‘peg’ have surfaced once
more but stronger than ever. This time, however, the pressure and
speculation is not just on the
Hong
Kong
$ but also the Remembi,
the international currency of the
Peoples
Republic
of
China
(as against the Yuan, the internal currency).
Recent meetings with
Hong Kong
business people have revealed much about the
undercurrents in
Hong Kong
business and social society. The June 1997 hand over
passed peacefully and with unexpectedly little effect on the economy,
business or society. In hindsight many in
Hong Kong
,
those working as expatriates, British, American or Australian in the main,
and the Hong Kong Chinese population, have come to believe that this was a
deliberate policy of the PRC. This being a determined effort to prove to
the world that the hand over would have no effect on the
Hong Kong
economy. It should never be lost sight of that although the economy of the
mainland, per capita, bears no comparison with that of
Hong Kong
or any developed nation, the sheer size of the country provides a society
with enormous economic muscle. From size alone the control of the
Hong Kong
economy by the PRC is total, and has been for many years.
As nearly a year has passed since the hand over of the former British
Colony, the local belief is that the PRC would no longer ‘lose
face’ if it were to allow the
Hong Kong
economy to go in to recession. It is certainly true that from the viewpoint
of the PRC a devaluation or float of the Hong Kong $ (which would amount to
the same thing) would save billions of $ of foreign exchange, not to
mention the cost of ongoing pension payments to retired civil servants who
have moved to Europe, Canada or Australia (and even Cyprus).
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This general lack of conviction that the currency will remain
‘pegged’ has been at the root of the ills that face the
Hong Kong
economy now. Interest rates have once again risen and there is a general
lack of confidence in the future. Cathay Pacific, the
Hong Kong
airline, is (or was!) one of the 20th century’s greatest business
success stories. Starting in 1954 with the purchase of two second hand DC3
aircraft, Cathay Pacific grew to be one of the world’s great
airlines.
Flying to the four corners of the world with a fleet of Airbuses and Boeing
Aircraft which was always one of the newest fleets in operation. Cathay
Pacific along with Singapore Airlines and British Airways was always the
first to order new models. From the first 10 deliveries of any new
aircraft, 747 megatop even a pre order of the projected 800 seater and the
edge of space hypersonic super liner.
The success of Cathay Pacific has been a direct reflection of the success
of
Hong Kong
. The more successful and richer
Hong Kong
and its residents became the more they travelled internationally and the
more visitors, both business and tourist, came to see the economic miracle.
This in turn made Cathay Pacific successful and richer. Thus Cathay Pacific
in no small part was responsible for the growth in air traffic to
Hong Kong
which resulted in a small air force base becoming one of the busiest
airports in the world, a single runway coping with up to 45 movements an
hour. Even the runway was a feat of engineering built 5 km out into the
harbour on reclaimed land.
The pendulum has now swung, however, Cathay Pacific recently made 7500
employees redundant. A 747 was reported as returning from
Tokyo
with only two paying passengers. Air movements are
down to a level which has the old airport running at only two-thirds
capacity – with many empty seats on aircraft. Questions are now
seriously asked whether the vast cost of the new airport, reported as US $
10 billion, and perhaps in truth at least twice that, had any justification
whatever.
Much of the cost of the airport was expected to be recovered from the sale
for redevelopment of the land on which the old airport stood. In addition
was to be the land sales of the surface and surrounding land of the new MTR
(Mass Transit Railway) stations that were part of the infrastructure of the
new airport development.
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Land sales in
Hong Kong
have always been watched with great interest, as
discussed earlier, when a car park place can sell for $125,000 the sale of
a square kilometre is a major event. The latest Government lands sales have
been very disappointing, prices set as minimums at auction have not even
come close and the latest sales have fetched prices equivalent to less than
20% of those achieved just a year ago. This has naturally set a few alarm
bells ringing around the board rooms and banks of
Hong Kong
.
The
Japan
experience of the last few years is not easily
forgotten. In the 80s property prices in
Japan
went through the roof (no pun intended!) and it was
statistically true that the land the
Imperial
Palace
in
Tokyo
stood on was worth more than all the real estate in
New York
. These inflated property prices in
Japan
resulted in the balance sheets of property and other
companies owning property, looking unjustifiably healthy. Bank loans and
share prices were supported by property assets that were shortly to be
heavily devalued. The recession and long lived bear market, that has hit
Japan
in the last years has been the result.
So what of
Hong Kong
? The
US
government has recently stepped in to support the
Japanese Yen, in the short term this has helped the
Hong Kong
$ and the Remembi -- and the markets. Speculators are not so easily fooled
and the fundamentals are not right. Unemployment in
Hong Kong
is at an unheard of 4.6%, hotels and aircraft are still empty, the new
airport is looking like a white elephant and local confidence is at the
lowest ebb for more than 20 years. Pressure on the
Hong Kong
$ and the Remembi will probably return and in the end the speculators will
probably win. This makes the long-term prospects singularly unattractive
and investors other than the bravest are perhaps better to avoid the region
for the foreseeable future.
Ross
Pays is the Chairman of The FAA based in Cyprus. FAA offer advice on wills,
tax registration services, home, health and car insurance, investment
services and tax planning, including Inheritance Tax Planning, together
with full accounting services.
Visit Ross Pays website at www.rosspays.com, Telephone 00 357 25 82 58 76, Fax 00 357 25 33 35 93 or
e-mail ross@rosspays.com
Initial consultations are free and no obligation and
fee quotations will be provided in advance for all services. |
