Ron, since you are heavily invested in Hong Kong/China, I should very much like to know your opinion of the following piece. And, specifically, would you agree that "a 20% fall in the U.S. market would send the Hang Seng plummeting"? And if the fate of the Hong Kong market is indeed that closely tied to the U.S. stock market, should that not moderate expectations that one can get a better return on investments there than in the United States?
I.D.E.A. Global Focus Apr 21 1999 6:05AM CST
Asia Focus -- Successful Hong Kong land auction belies risks.
Hong Kong's first property auction in nine months was a surprising success, raising hopes the depressed real-estate sector is on the verge of recovery. InterMoney thinks investors should tread carefully.
Bidding was hectic at the government land auction on Tuesday -- the first since sales were suspended in 1998. The sale was closely watched because it gives an idea of how real estate prices will move in coming months.
The three plots of land fetched a total of HK$1.49bn (US$192m), well above analysts' expectations of between HK$1.1bn and HK$1.3bn. The premium paid indicates that developers are hopeful property prices will rise sharply this year, after halving in the last two years.
But InterMoney thinks that's too optimistic, a view apparently echoed by the territory's biggest, trend-setting property developers, who left the action to medium-sized firms.
Market-heavyweights Cheung Kong and Henderson Land were represented at the auction but made no bids. The real-estate giants said prices rose too high, too fast.
'The real estate market's going to run higher for a few months, but there are a lot of risks and I wonder how long the gains can be sustained,' says Jimmy Koh, IDEAglobal.com's regional economist.
The optimism in the property sector is being fuelled by low interest rates and recent gains in equities.
The Hang Seng share index has gained 95% since August last year, backed by a robust Dow Jones industrial average.
With the Dow moving from strength to strength, investors have cast aside fears of a global equity meltdown. Foreigners have been buying heavily into Asian stocks in anticipation of the region's imminent recovery.
As stocks rise confidence grows. People flush with cash from share investments could start looking to invest in property. InterMoney thinks prices could go up by between 15% and 20% incoming months.
A property recovery should help the wider Hong Kong economy -- the real-estate sector accounts for one of every 10 jobs and contributes to profits in seven of every 10 companies.
Look for GDP to shrink by 2% this year, after 1998's 5.0% drop.
But property's recovery is by no means a sure thing.
Many feel US shares are too expensive. On Tuesday, IMF chief economist Michael Mussa warned the US stock market was 'very highly valued' and could see a fall of up to 20%.
That would send the Hang Seng plummeting, shaking confidence. Uncertain of Hong Kong's recovery -- unemployment is already at 25-year highs -- people are likely to put off property investments and delay buying homes.
There's no guarantee either that Hong Kong will be able to keep interest rates and, as a result, the cost of borrowing low.
The biggest threat comes from the Chinese mainland and the yuan.
China's exports have been suffering under its fixed exchange rate. Other Asian currencies fell sharply in the midst of the economic crisis last year, leaving China's goods looking relatively expensive.
IDEAglobal.com's sources suggest that Beijing has already formed a committee to decide when the yuan should be devalued. If the government decides to move the yuan's fix to the dollar, speculators will assume that the Hong Kong dollar's peg to its US counterpart is also fair game.
Any attack on the Hong Kong dollar will push up interest rates, increasing borrowing costs and driving buyers from the property market.
It's a grim scenario, but not a total impossibility. Buyer beware.
wallstreetcity.com
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