CONFIDENTIAL
03.
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MDHIAN
DUBIOUS PROJECTS, WHICH WILL BE HARDEST HIT IN A CREDIT SQUEEZE.
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THE DIRECT CONSEQUENCES FOR HONG KONG WILL DEPEND ON
WHETHER CHINA EXPERIENCES A SOFT OR HARD LANDING. THE IMPACT HERE OF A SOFT LANDING WOULD PROBABLY BE GENTLE, AND NEED NOT THREATEN OUR CURRENT PROJECTION OF AVERAGE ANNUAL GDP GROWTH OF 5 PERCENT OVER THE NEXT FEW YEARS. WITH THE HARDER LANDING MANY ANALYSTS NOW APPEAR TO EXPECT THIS MAY PROVE OPTIMISTIC. GROWTH IN HONG KONG EXPORTS TO CHINA WOULD SLOW ABRUPTLY WITH CHINESE DEMAND. WE, AND PRIVATE SECTOR ANALYSTS, ESTIMATE THAT THIS COULD TRIP 1 TO 2 PERCENTAGE POINTS OFF HONG KONG'S 1994 GDP GROWTH RATE, DEPENDING ON THE SEVERITY OF CHINESE RESTRAINT MEASURES.
4.
BUT OUR EXPERIENCE IN 1989 SUGGESTED THAT THIS DOWNTURN MIGHT NOT LAST LONG. AND EVEN A HARD LANDING WOULD HAVE AN UPSIDE. REDUCED DEMAND FROM CHINA WOULD ALLEVIATE INFLATIONARY PRESSURES HERE, PERHAPS BRINGING INFLATION (CURRENTLY AROUND 8.5 PERCENT) DOWN ALMOST ONE PERCENT BY 1995. PORPERTY PRICES MAY RETURN TO EARTH, IF CHINESE OFFICIALS AND ENTREPRENEURS (INCLUDING RELATIVES OF SENIOR LEADERS) FIND IT HARDER TO SIPHON CAPITAL INTO PERSONAL INVESTMENTS IN HONG KONG PROPERTY (WHEN NOT INVESTING IN THE UK: VIZ THE CITIC CHAIRMAN'S REPORTED PURCHASE OF THE MACMILLAN ESTATE IN SUSSEX). BUT HONG KONG'S EXISTING INVESTMENT IN OUTWARD PROCESSING ACROSS THE BORDER SHOULD NOT SUFFER, AND MAY EVEN BENEFIT FROM RENMINBI DEPRECIATION, (WHICH LOWERS THE HONG KONG DOLLAR PRICE OF HONG KONG'S IMPORTS, HENCE RE-EXPORTS FROM CHINA).
5.
WE SEE NO CURRENT THREAT TO MONETARY STABILITY IN HONG
KONG. BUT MONETARY PRESSURES ARE BECOMING LESS PREDICTABLE. IT IS ALREADY CLEAR THAT CHINESE ENTITIES HAVE FOR SOME MONTHS BEEN REPATRIATING TO CHINA FUNDS HELD HERE IN HONG KONG DOLLAR DEPOSITS. THIS FLOW HAS APPARENTLY BEEN DRIVEN LARGELY BY INCREASED IMPORT REQUIREMENTS. THERE ARE SIGNS THAT IT HAS INTENSIFIED IN THE LAST FEW WEEKS, AS THE BELATED MONETARY SQUEEZE TOOK EFFECT. ONE CONSEQUENCE HAS BEEN SOME WEAKENING OF THE HONG KONG DOLLAR (WHICH HAS NEVERTHELESS STAYED ON THE STRONGER SIDE OF THE 7.80 HK/US DOLLAR PEG). WITH ZHU RONGJI NOW GOVERNOR OF THE PEOPLE'S BANK OF CHINA, THE MONETARY SQUEEZE SEEMS LIKELY TO CONTINUE.
6.
BUT THESE FIRST ORDER ECONOMIC EFFECTS COULD BE
OUTWEIGHED BY THE PSYCHOLOGICAL IMPACT OF CHINA'S ECONOMIC PROBLEMS. IF CHINA'S DOMSTIC ECONOMY FALTERS, A SUCCESSFUL HONG KONG ECONOMY SHOULD BECOME MORE IMPORTANT FOR IT, IF ONLY AS A VITAL SOURCE OF HEALTHY GROWTH. THIS WILL HOPEFULLY ENCOURAGE A
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