Bangkok--Feb 18--Aziam Burson
Hong Kong’s Super Loose Financial Conditions
We estimate that overall financial conditions in Hong Kong have not been
this loose since 1993.
We estimate that Hong Kong’s economy grew by close to 8% last year, led by exports. But domestic demand is also revving up. Hong Kong has one of the
world’s most open economies, and so its robust exports, with a lag, are having large spillover effects on the domestic economy. But also underpinning domestic demand is another channel that seems not as well appreciated, but perhaps is even more important, given Hong Kong’s large financial and property sectors: the sharp drop in real interest rates, in tandem with rising equity and property prices. Together they are spurring credit creation, boosting confidence, and having positive wealth and balance sheet effects.
Collectively, the weakening HK$ (on a real trade-weighted basis), the
decline in real interest rates, and the rally in asset prices have, on our
estimates, resulted in the loosest overall financial conditions in Hong Kong since 1993. And we judge that conditions will get looser. Hence, our bullish 2005 GDP growth forecast of 5.5%.
Multiplier effects
Hong Kong’s merchandise exports grew by almost 16% last year, driven by
China’s booming and rapidly opening economy. Hong Kong has thrived from being the main entrep๔t for trade between China and the rest of the world. Indeed, re-exports make up 94% of Hong Kong’s total merchandise exports. Hong Kong’s exports of services grew at an even faster pace of 17% y-o-y in Jan-Sep 2004, again underpinned by Chinese demand: visitors from the mainland are coming in droves, and now account for more than half of Hong Kong’s total visitors.
This year, a slowdown in the world economy may weaken Hong Kong’s export
growth, but not dramatically. There are three reasons.
First, China’s economy looks set to continue its robust growth; two week’s ago we raised our 2005 GDP growth forecast for China from 8.3% to 8.8%.
Second, since the HK$ is pegged to the weakening US$, Hong Kong has gained
competitiveness: its real trade-weighted exchange rate has weakened by 33% from its peak in 1998, and we expect it to continue to fall.
And third, the number of visitors from China will likely climb to a new
record high this year, helped by the opening of Disneyland and a revaluation of the renminbi. Hong Kong’s exports are 1.9 times GDP, a very high ratio by world standards. So it is not surprising that Hong Kong’s robust exports are having large multiplier effects on the domestic economy. Hong Kong companies, faced with healthy profits and diminishing spare capacity, are increasing their demand for capital and labour. Hong Kong’s imports of capital goods grew by a solid 13% y-o-y in 4Q 2004, while the unemployment rate has fallen by 2pp to 6.5% in December
2004, and we expect it to drop below 6% by the end of this year. Wages are growing again too. And with more jobs and higher wages, median household income rose for the second straight quarter in 3Q 2004, by 3.3% y-o-y, after declining for ten quarters in a row.
End.