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31 July, 2001 Quarterly Hong Kong Review |
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Third Quarter, 2001
Economy expected to grow by 2.5% in 2001 Continuing the slowing trend in the first quarter, Hong Kong's real GDP growth is expected to have eased further in the second quarter. Hit by weakening demand in the US and Europe, exports contracted by 4.8% year-on-year in the second quarter reversing the 2.2% growth in the first. As domestic demand has remained lackluster due to the sluggish employment conditions, the weakening of exports would drag real GDP growth down to only 1.5% in the second quarter from 2.5% in the first. Looking ahead, however, Hong Kong's growth prospects should improve thanks to an expected recovery of the US economy.
As the impact of the aggressive interest rate cuts since January this year filters through the US economy, and the generous tax rebates are handed out to taxpayers in the third quarter, US consumers are likely to resume their shopping spree later this year. The resumption of consumer spending would in turn prompt US companies to increase imports to replenish the depleted inventories. Hong Kong's exports, 23% of which were US-bound last year, stands to benefit from the rebound of import demand in the US towards the fourth quarter, and could pick up more strongly later this year. As the recovery of the US economy gathers pace, local consumer confidence would also improve gradually in the coming months. Thanks to the 275-basis-point cuts in local interest rates during the first half of this year and the excess liquidity in the banking sector, Hong Kong's mortgage lending rate has fallen to its lowest level in 30 years. Continued record-low mortgage rates should help to stabilize property prices which would in turn strengthen consumer confidence. Supported by a gradual recovery of consumer confidence, private consumption is likely to grow more strongly towards the end of this year. The rebound of exports and stronger domestic spending should help to boost real GDP growth to 4.2% in the fourth quarter, bringing the full year average growth to 2.5% in 2001. Hong Kong to experience another year of deflation During the first half of 2001, Hong Kong's composite consumer price index (CPI) declined by an average of 1.7% year-on-year, compared with the average decline of 3.7% recorded in 2000. The easing of deflation was mainly attributed to the narrower decline of housing rents, a rise in transportation and service fees, and a rise in duties imposed on alcoholic drinks and tobacco. These, however, were not enough to pull Hong Kong out of deflation, as retailers are still under heavy pressure to keep prices low to boost sales. Despite the 275-basis-point interest rate cuts since January, consumer confidence remained weak due to rising unemployment and falling asset prices. Hong Kong's unemployment rate, which fell steadily throughout 2000 from 6.1% to 4.3% in the three months ended January 2001, picked up anew and remained at 4.6% since March. Stocks and property prices also remained sluggish. Compared to the end of last year, the Hang Seng Index plunged 19.9% as at July 30, while property prices which turned weak since November 2000 remained about 14.7% below their year-ago levels at the end of April. During the first five months this year, retail sales growth declined to 2.4% year-on-year in volume terms, from 8.1% in 2000. Apart from the domestic deflationary pressure, the depreciation of the neighboring Asian currencies, particularly the Japanese Yen, also led to weaker prices of imported goods.
Looking ahead, as consumer confidence is expected to only slowly pick up in the coming months along with the rebound of the US economy, retailers would unlikely hastily introduce material price hikes in the remainder of the year. Hong Kong is thus likely to experience a third year of deflation in 2001, with the composite CPI expected to decline by 1.2%, compared to 3.7% in 2000. Tourist arrivals recorded steady growth Having reached a record 13.1 million in 2000, tourist arrivals in Hong Kong grew at a more moderate pace this year. During the first five months of 2001, 5.5 million tourists visited Hong Kong, up 7% from the same period last year. Although much slower than the 15.3% recorded in 2000, the growth rate was nonetheless impressive considering the high comparative base last year, and the US economic slowdown which has inflicted the global economy.
Although continuing economic concerns and currency weakness in the home countries have led to mild declines in arrivals from Western Europe, Australia, New Zealand and a handful of Southeast Asian countries, tourists from North Asia remained robust during the period, thanks to the aggressive promotions of airlines and travel agents. Meanwhile, visitors from the mainland also increased steadily, as robust domestic economy and residents' rising income allowed them to spend more on traveling. The continued growth of tourist arrivals was also attributed to a number of main exhibitions and conferences held in Hong Kong this year such as the Fortune Global Forum and International Computer Expo which attracted business travelers. Despite the robust turnout of tourist arrivals, the growth of tourism receipts is not catching up as rapidly due to lower hotel charges and a trend towards shorter length of stay. According to a survey conducted by PricewaterhouseCoopers, although some hotels in Hong Kong have attempted to raise their room rates as the economy improved, the average room rates have come down by 34.8% to US$ 103 per night from the mid-1997 peak of US$ 158. Meanwhile, tourists have been spending an average of only 3 days in Hong Kong during their trips compared to 3.6 days in 1997, and 34% of those who came to Hong Kong stayed only for a day during their visit. Last year, per capita tourism receipts were $ 252 less than the $ 4,791 recorded in 1999. To rejuvenate tourism receipts, the government is seeking ideas on ways to enhance tourism-related developments. A number of proposals to develop areas such as the Victoria Harbor front and Quarry Bay waterfront into tourism-oriented commercial and retail projects have already been submitted by the business sector. The government hopes that increasing the number of tourist attractions would encourage visitors to stay longer and spend more in Hong Kong.
Argentine crisis not a threat
to the Hong Kong dollar peg
However, as the sharp differences between the two economies reasserted themselves in the market, the jitters in the Hong Kong dollar quickly subsided. Unlike Argentina which suffered mounting foreign debt and large fiscal deficit that are eroding confidence in the peso, Hong Kong holds negligible foreign debt and huge fiscal reserves which have lent strong support to the peg.
Bank interest rate cartel abolished
on July 3, 2001 The fear of keener competition, however, failed to materialize thanks to abundant bank liquidity and sluggish loan demand. So far, no bank has bid up its savings deposit rate to above 2% -- the rate that would have prevailed had the Hong Kong Association of Banks continued to set the market savings rate. Instead, banks introduced tiered interest rate structures and designed consolidated banking products that offered bonus rates on top of the regular savings deposit rate to clients who held larger balances in their accounts or used more of the bank's products. As such practice would encourage bank clients to pool their funds and banking needs into one bank that offers a broader diversity of products, smaller banks would particularly be pressured to rapidly upgrade their technologies to keep up with the demand for more sophisticated banking products such as integrated accounts and internet banking services. Amidst an increasingly competitive market, these banks would also seek to improve their economies of scale to protect their profit margins. In the process, mergers and strategic alliances would likely be resorted to. Bank lending remained sluggish Loans for use in Hong Kong grew by a marginal 0.6% year-on-year in May, down from the 1.6% growth recorded at the end of last year. The weaker growth was in part due to the global economic slowdown, which had dampened investment confidence, and therefore funding needs in the commercial sector. The decline in loans to finance trade, in particular, widened to 12.3% year-on-year in May from 8.7% in December 2000, as the growth in exports from Hong Kong was stagnant during the first five months, while imports edged up only 1.3% year-on-year during the period. Outstanding mortgage lending also eased marginally by 0.3% year-on-year as at the end of May, with the amount of new mortgage loans approved during the first five months contracting by 35.4% compared to the same period last year, due to prolonged sluggishness in the property market. On the back of weak loan demand, the Hong Kong dollar loan-to-deposit ratio, which averaged 112.3% between 1992 and 1996, declined to 91.4% in May, reflecting a surge in excess liquidity in the banking sector.
Looking ahead, with mortgage loan rates remaining at record-low levels, transactions in the property market would pick up gradually which should help to boost the amount of new mortgage lending. The resumption of US consumption growth in the coming months would also spur a rebound in Hong Kong's exports and support a stronger growth of trade finance. Barring any dramatic deterioration in neighboring Asian economies, particularly Japan, the demand for loans would likely grow at a faster pace towards the end of the year. Property market transactions picked
up 12.8% in the second quarter
The pick up in property transactions was due to a substantial improvement in the affordability of residential properties. With a total of 275-basis-point cut in interest rates since January this year, and given the excess liquidity in the banking system which prompted banks to compete aggressively in the mortgage market by lowering mortgage lending rates to a norm of prime minus more than 225 basis points, mortgage lending rates in Hong Kong have fallen to their lowest levels in thirty years. Meanwhile, residential prices experienced little change this year from end-2000 level, as property developers continued to launch their projects at low prices and throw in an array of incentives such as cash rebates and top-up mortgage loans, which make primary market flats even cheaper than those in the secondary market, to boost sales. According to the latest available price index of popular residential estates, residential prices as at the end of April fell by 0.6% from December 2000 and are still 14.7% lower than their year-ago levels.
In view of the substantial residential housing supply in the primary market against waning confidence of homebuyers, property developers are likely to continue to keep prices low to attract buyers. According to the Rating and Valuation Department, private residential completions for 2001 and 2002 would total 27,756 and 29,653 units respectively, compared to the average annual supply of 24,292 in the period 1996-2000. However, the continued improvement in housing affordability thanks to the record-low mortgage rates, should help to limit the decline of property prices in the months ahead.
HONG
KONG MAJOR ECONOMIC INDICATORS
CITIBANK, N. A. Jason Kwok Joe Lo Ellen Cheuk Alice Chan Quarterly Hong Kong Review is available for retrieval in the following Citibank internal systems: CitiWeb, EMLink, Hong Kong e-BM Website, and Hong Kong GCIB Website. For soft copies of this report, customers are advised to contact your Account Manager. The report is also available for public viewing at the Economic Forum subsite of hktdc.com. This report is for information only. While the information contained in this report has been obtained from sources which we believe to be reliable, we can make no guarantee as to either the accuracy or the completeness of the information. |
