Riders on the Storm (hktdc.com)

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21 January 2009

Riders on the Storm


Hong Kong SMEs are "innocent bystanders" to the global financial train wreck, says Ping An of China Asset Management's Chi Lo

Given today's global economy, Hong Kong firms should be employing all the business tools at their disposal. Ranking high on this list, experts say, are things like managing your cash flow, staying on top of your inventory and being willing to spread the risk with partners.

But while all that may help, most SMEs can do little but watch and hope that demand from the developed world recovers as quickly as possible. That, at least, is the view of Chi Lo, Investment Research Director at Ping An of China Asset Management (Hong Kong) Co Ltd.

Despite recent moves by the Hong Kong Government and various banks to establish loan programmes and government guarantees, "the problem is that this is a developed-world recession that has destroyed demand," Mr Chi said.


	New Market Havens
	Taiwan continues to show promise for Hong Kong companies. Despite a weakening of Hong Kong's intermediary role in the near term, it should benefit from growing business ties between the mainland and Taiwan. In particular, direct transportation, business and postal services (the "three links") will stimulate trade and investment across the Strait. Having long been the services hub of Taiwanese companies doing business with the mainland, Hong Kong should profit from the increased two-way flow. Despite concerns about the health of its banking sector and persistent inflationary pressures, Vietnam is another promising market, particularly in the medium term. It's also a possible alternative production base. The country is taking further steps with market-oriented reforms, laying the foundation for sustainable expansion. Poland and the Czech Republic, aided by prudent fiscal policies, are less vulnerable to the global financial crisis. In Poland, massive EU-funded investment projects will prop up domestic demand. Russia, even with a weak financial system, can take advantage of the accumulated wealth derived from high oil and commodity prices. Its large consumer market should offer prospects for Hong Kong's value-for-money products. In Latin America, economic growth will slow amid recent adjustments in commodity prices. Slower US demand for Latin American exports will also dent regional growth, hurting nations with close US links, notably Mexico. The business focus will be on Brazil and Chile, where relatively robust domestic consumption and a growing interest in trade with Asia will generate more opportunities for Hong Kong suppliers. Economic performance in the Middle East is susceptible to the prevailing softness of oil demand. Nevertheless, accumulated windfalls from high crude prices, along with sustained infrastructure and housing investment, will help maintain the region's economic health. For more on emerging markets, order the HKTDC Trade Quarterly at www.hktdc.com/bookshop

The recent measures "help on the funding side, but not on the demand side," he said. The government's moves and those by the banks don't "really change my outlook. You can run lean and mean, but there's only so much you can do to maintain the margins.

Mr Chi forecasts that the developed-world recession will end late this year, and that the United States would "bottom out faster" than Europe.

Innocent Bystander


Hong Kong SMEs: the more liquid, the better

"Hong Kong is an innocent bystander," Mr Chi said. "Hong Kong has strong systems, good banks, good governance, but all of our neighbours have been hit. During the Asian financial crisis, the developed world was still growing. This time, the developed world engine is dead, and the internal growth momentum in the Chinese mainland isn't as strong as we thought. The domestic demand growth is not as strong."

Hong Kong's openness is also both a help and a hindrance, Mr Chi said, because Hong Kong "is too open to shield itself from the world. You are open to more risks but also to more opportunities," he said.

Being part of the mainland is one clear benefit for Hong Kong SMEs. "This year, while the developed world is still in recession, the mainland will still be growing, so that will give Hong Kong some hope while the rest of the world is slowing down."

SMEs also should maintain a low debt burden, Mr Chi said, in order to survive the current crisis.

"The loan-to-deposit ratio has come down every year since the Asian crisis, to about 60 per cent," Mr Chi said. "That's compared to the United States, where it was 110 before the crisis and still above 100 now. One of the big problems is the huge debt burden in the United States. Hong Kong doesn't have that problem at all."

The more liquid SMEs are, the better off they are, according to Mr Chi. "The government's measures will help a lot," he said, but "those who will win out faster, who will weather the storm, are those who don't have to borrow that much. They have their own cash they can put into operation, and they will get out faster than the rest of the crowd."

Chi Lo spoke last month at a World SME Expo seminar, "Strategies of Coping with an Adverse Economy for SMEs in 2009."