Donald ...... More News on Hongkong. FYI
By Sarah Davison HONG KONG, Oct 23 (Reuters) - Hong Kong will have to raise interest rates even higher to defend the Hong Kong dollar link to the U.S. currency, sacrificing its economy in favour of long-term financial stability, economists said.
Thursday's stock market crash, the largest one-day fall in history, left confidence in tatters as regional currency jitters jacked up Hong Kong rates.
Economists are cutting economic growth forecasts and waiting for the next major development with markets buckling under the interest rate burden exacted by the Hong Kong dollar peg.
"If the negative approach to the Hong Kong market continues for a protracted period of a few weeks, we're looking for a pretty rough 1998," said Ian Perkin, chief economist at the Hong Kong General Chamber of Commerce.
The blue chip Hang Seng index ended 1,211.47 points or 10.41 percent lower at 10,426.30. The index has shed more than 23 percent in the last four trading sessions, plunging as interest rates soared. One-month interbank rates reached 47 percent while overnight money leapt to 250 percent.
But economists said rates will have to rise even higher to maintain a defence of the Hong Kong currency, which has been linked to the U.S. dollar at a rate of HK$7.80 since 1983.
"The peg to the U.S. dollar, with U.S. dollars fully funding the Hong Kong currency, will stay," said Jan Lee, chief economist at Hongkong & Shanghai Banking Corp.
"The net result is that interest rates will go up in the immediate term by at least 0.5 percentage points, and down the road even higher," he said.
Higher rates will trash the stock and property markets, depressing the entire economy just months after Hong Kong returned to China after 156 years of British colonial rule.
Lee has cut his 1998 economic growth forecast to 4.75 percent from 5.5 percent, becoming one of the few Hong Kong economists brave enough to identify clear economic targets in an uncertain outlook. Some said they had a variety of forecasts depending on a number of different scenarios.
"Our assumption is the peg still holds but the degree of damage inflicted varies," said Michael Taylor, economist at broker W.I. Carr.
And the degree of damage depends largely on how long interest rates remain high.
"How long is a piece of string?" asked Perkin. "Once these things start it's very difficult to put a time on them."
Attempts by Hong Kong banks to restrict outflow of domestic capital by refusing to redeem time deposits before maturity were criticised as the wrong route to recovery.
Although the measures could help to prevent the mass exit of domestic capital -- considered the only serious threat to the currency link -- economists said they would heighten nervousness by undermining the established market mechanism.
"The way a currency board works, if people don't want to hold your currency, you raise rates until they do," said Don Hanna, chief economist at Goldman Sachs.
"Ultimately you're going to have to raise rates ... If you circumvent the process it only delays (recovery)."
Hanna joined other economists predicting a severe dent in Hong Kong's property market bubble -- something that could ultimately work to the territory's advantage.
"The issue of competitiveness and the cost of doing business in Hong Kong -- clearly the rise in interest rates is going to have an impact on that," Hanna said.
07:48 10-23-97
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