While the Asian currency crisis has brought the economies of Thailand, Indonesia and Malaysia to their knees, Hong Kong has been battling steadily against economic gloom.
While the former British colony got off lightly compared with some neighbors, in the past few months the outlook has appeared gloomier still, and some pundits forecast still harder times ahead for this Special Administrative Region of China.
Kanika Singh, Asian regional economist of the Institute of Development of Economic Analysis in Singapore, offers a grim assessment: "I believe this is going to be one of the toughest years that Hong Kong's economy has ever had to face."
She expects to see Hong Kong's economic climate worsen because it is not competitive with its Asian neighbors, it has a low 2% projected growth rate (compared with 4.7% to 5.5% in 1996), interest rates are high and the Hang Seng index has been unable to sustain breakouts beyond the 12,000 level. Those factors combine with the possibility of breaking the link between the local currency and the U.S. dollar.
A recent report released by global investment bank SBC Warburg Dillion Read echoed Ms. Singh's pessimism. It maintains a bearish 12-month target level of just 10,000 for the Hang Seng index, claiming the current market rally stems from overly optimistic assumptions.
In an Asian strategy overview, SBC Warburg's Asian research unit said, "Hong Kong will not break out of the trading range established since October on a sustainable basis. In the optimistic event that regional currencies have bottomed, Hong Kong will underperform the region because the market does not have the potential to rebound in terms of not just the local equity index, but also the currency."
SBC Warburg advised investors looking to buy local stocks to stick to cash-rich Hong Kong firms such as Hong Kong Telecommunications Ltd. and CLP Holdings.
Indeed, evidence of the economic malaise has been pervasive. Major players in the market, unusually vocal during a bull market, are suddenly mute.
"It's not that I don't want to comment, it's just that my company won't want me to say in print just how bad it is, or could get," said one trader.
Property prices, a key to Hong Kong's economic foundation, have crumbled in the past six months. The residential market has slowed in favor of rentals, as home buyers and speculators alike believe the market has not fully bottomed out. Once prime office space stands empty and per-square-foot prices appear to fall by the week.
A property analyst at a Hong Kong international securities firm, who asked not to be identified, predicted the sector will worsen. "We believe the sector's recent outperformance is merely a technical rebound and shouldn't be taken more seriously than that. Fundamentally, the sector appears unattractive in the long term and we strongly believe that Hong Kong's economic downturn has yet to take its full toll."
Jan Lee, chief economist at Hongkong and Shanghai Banking Group in Hong Kong, also believes residents should tighten their belts for a few more years.
"Hong Kong is going through a post-bubble economic environment and is going to see a subdued recovery for the next three years -- at the very least," he warned. "For the last 10 years Hong Kong has averaged around 5% GDP, that's now going to be nearer 3% growth for a while to come."
Hong Kong's statistics will begin to look rosier only when the Special Administrative Region can offer more value-added services and industries, he said.
"The Americans went through this in the early 1990s and managed to disinflate the economy by downsizing, outsizing and growing technology and productivity. Hong Kong needs to do the same," Mr. Lee said.
Although the Hong Kong dollar weathered the Asian currency crisis storm earlier in the year, a leading foreign exchange head at a large international bank predicted speculative battering ahead.
"The Hong Kong dollar is still under pressure, but I believe it will come in for a heavy and sustained attack from speculators once the conditions are right," said the executive, who didn't want to be identified.
He also anticipates the economy will be rocked when the Hong Kong dollar is no longer pegged to the U.S. currency. Although he declined to estimate when that may occur, he stressed, "It's not a case of if, but when this happens, and that may be sooner than some people expect -- or would like."
Unemployment, once almost invisible in Hong Kong, is becoming a common headline in local newspapers. Unemployment figures released last week showed unemployment during January and February at 2.9%, a steady rise from the past few months. For the period from July to September, the unemployment rate was 2.2%, and for the October-to-December period, 2.5%.
Ms. Singh believes that, by the end of this year, Hong Kong's unemployment rate might be the highest ever, at about 4%.
"This may not seem an awful lot in comparison to other countries, but for Hong Kong, which has enjoyed almost full employment in the past few decades, this is unheard of," she said.
She expects streamlining in companies to continue -- especially in the finance sector.
Hotels and tourism have suffered under the downturn, and the problem has been exacerbated by the sudden competitiveness in other Asian countries. Tourist arrivals plunged after the handover of sovereignty of Hong Kong to China. Thailand, Indonesia and Malaysia -- a few hours by plane from Hong Kong -- are wooing tourists with reduced air fares, hotel packages and goods made cheaper by devalued currencies.
Simple day-to-day changes also are evident. Taxis that once were battled over (at least during the typhoon season), now cruise the streets and -- unheard of until a few months ago -- slow down if drivers spot a potential fare. Drivers are even polite.
Even Hong Kong's notoriously haughty brand-name stores have been humbled. Sales with as much as 70% to 80% off are being studiously ignored as tourists seek cheaper countries and locals save for possible layoffs. As a result, retailers saw consumer spending drop by more than 30% in December, said Anita Bagaman, executive director of the Hong Kong Retail Management Association.
When will the rebound come? Amid the waves of current gloom, flickers of optimism can be seen.
Nichols Pang, executive director at Nomura International (Hong Kong) Ltd., sees an economic pickup either later this year or early next. But that forecast depends on two key factors: how well the overall region weathers the economic storms and how soon mainland China "aggressively pursues reforms."