Signs of Slowdown Abound in Hong Kong

HONG KONG -- The financial crisis and China's slowing growth are hitting the cornerstones of Hong Kong's economy, putting businesses on the defensive and igniting fears of a property slump.

On Monday, Hong Kong reported its closely watched purchasing-managers index fell to its lowest level in more than five years in October as business activity contracted for the fourth straight month, with new work from mainland China down for a fifth consecutive month. Hong Kong's retail sales rose 6.9% in September from a year ago, city officials said on Monday, down from 10.2% in August and disappointing economists.

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Hong Kong Financial Secretary John Tsang said on Thursday that a recession is increasingly likely, as official figures on Friday recorded a first-half deficit of 48.6 billion Hong Kong dollars (US$6.27 billion), the biggest in five years.

In recent weeks, a number of high-profile businesses in Hong Kong have closed or liquidated, including Tai Lin Radio Services, a 60-year-old electronics retail chain; U-Right International Holdings, a clothing retailer with hundreds of outlets in Hong Kong and China; and the local franchise of Krispy Kreme Doughnuts Inc. One of the city's largest and most prominent conglomerates, Hutchison Whampoa Ltd., said last month that it was halting uncommitted spending until next June and re-examining all new investments.

Big financial firms, one of the pillars of the city's economy, are also cutting back. Merrill Lynch & Co. and UBS AG have made cuts in Asia. HSBC Holdings PLC slashed 1,100 jobs in its global banking and markets division, including 100 jobs in Hong Kong. More than 80% of 520 senior bankers and executives at Crédit Agricole SA's Hong Kong-based regional brokerage unit CLSA Asia-Pacific Markets have agreed to pay cuts of as much as 25% next year.

China's weakening southern industrial region could add to the pain because many factory owners have headquarters in Hong Kong. Amid layoffs and plant closures in that region, the Federation of Hong Kong Industries, which is lobbying the city's lawmakers to toughen bankruptcy protections, claims 17,500 businesses could go under by January.


The rising doubts have hit Hong Kong's two major indicators of confidence: the stock exchange and the property market. Hong Kong's benchmark Hang Seng stock index is down about 50% from its high of about a year ago, though it has bounced back from lows in recent days. Real-estate brokers have slashed asking prices on apartments by as much as 40%, and landlords are starting to cut office rents that have risen fivefold since 2003.

Locals point to other anecdotal signs of a slowdown. A dinner for two at any of a handful of high-end restaurants could be had on a recent Friday night without a reservation.

Other parts of Asia have been hit by the slowdown in exports to the West. Singapore has slipped into recession. Hong Kong, a special administrative region of China, might be better-positioned than many Asian nations as well as peers like London and New York to weather the storm. Many economists expect China to post economic growth of about 8% even with headwinds. Optimists also cite its political stability and deep markets.

"If any city can ride through this and come out a winner, it's Hong Kong," says Steve DeKrey, chairman of the American Chamber of Commerce in Hong Kong. "It's a very resilient city, it's got huge reserves and it has very capable financial people in government."

The economic situation has slowed for now Hong Kong's efforts to bolster its status as a financial hub as it faces increasing competition from Shanghai, Singapore and the Middle East. Plans to turn the city into an Islamic financial center and other new ventures "are going to be shelved," says Li Kui-wai, an economics professor at City University of Hong Kong.

Hong Kong Chief Executive Donald Tsang, the city's top policy maker, says the initiatives remain on the table. But in an address to lawmakers earlier this month, he said the current economic moment is "not a time for innovation."

Public sentiment has soured in recent weeks. Residents last month began a run on Hong Kong-based Bank of East Asia Ltd. based on rumors that the bank was in a precarious financial position. About 1,000 mom-and-pop depositors protested at the headquarters of several banks in recent weeks, saying they were swindled by the banks into buying high-risk financial products that cost them their life savings.

In recent years, rents for office space soared to five times their 2003 rates as investment banks and the professional services firms that support them aggressively ramped up headcount. Now, "You're going to see people wanting to hand back space," says David Watt, the Hong Kong-based regional chairman of office broker DTZ. Rents are likely to slide down, Mr. Watt predicts, though he doesn't see a total collapse in prices.

Hong Kong has cut interest rates aggressively along with the U.S. Federal Reserve because its currency is pegged to the U.S. dollar. But Hong Kong's banks have been slow to pass on the savings to borrowers as interbank lending remains tight, adding further skepticism to the housing market and blunting much of the stimulus from lower rates.