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Thu, May 30, 2002 - Page 19 News List

What the weak US dollar means for Hong Kong

While a weaker greenback should help the territory become more competitive, it risks becoming complacent on reforms

By William Pesek Jr  /  BLOOMBERG , TOKYO

After years of nail biting over the yen's slide, Asia is grappling with a new challenge: A rising Japanese currency -- and a falling dollar.

While Tokyo is scrambling to reverse the trend, the dollar's fall from grace may leave the yen nowhere to go but up. That could be problematic for a number of Asian economies; if currencies rise versus the dollar, goods become less attractive on the global market. That is, unless you're Hong Kong.

Of all the beneficiaries of the dollar's slide, Hong Kong could be among the biggest. Its own dollar is pegged to the US currency, hurting Hong Kong's competitiveness in recent years as the US dollar rose. If the world's reserve currency is reversing course, as many believe, Hong Kong should get a boost.

For an economy mired in recession and deflation, a falling exchange rate is the equivalent of answered prayers. Not only will it provide stimulus to a comatose economy, but it will also relieve the will-they-or-won't-they speculation about whether Hong Kong plans to abandon its HK$7.79 peg to the US currency.

That's also the bad news. A recovery in the short run may reduce pressure on Hong Kong to revitalize -- and reinvent itself -- in the long run.

"While the weaker currency will probably give a cyclical boost to the Hong Kong economy and ease the pain of restructuring, we believe Hong Kong should not lose its focus on much-needed economic rebalancing," says Denise Yam, a Hong Kong-based economist at Morgan Stanley Dean Witter & Co.

With investors becoming less bullish on the outlook for US growth and markets, the dollar is losing strength. At the same time, traders doubt the Bush administration is as wedded to the "strong dollar" policy championed by the previous one. That's boosted the yen, and allowed the Hong Kong dollar to soften.

Still, a rebound led by exchange rates doesn't change the fact that Hong Kong is grappling with an identity crisis. Not since the handover back to China in 1997 has there been so much concern over its future in an increasingly competitive global economy. If a short-term recovery distracts officials from the need to develop industries to regain longer-term competitiveness, then it's more harm than help.

Yam's hardly alone in her thinking that Hong Kong should step up its efforts to specialize in niche, high-value-added and high-quality services. Doing so would utilize the city's international talent pool and entrepreneurial spirit. That also would mean enhancing the living environment to make Hong Kong more attractive to international human capital, as well as a more flexible immigration policy.

First, however, Hong Kong's government needs to get over its denial. The IMF expects Hong Kong's economy to grow 1.5 percent this year, the slowest in Asia outside Japan. That's hardly where Hong Kong hoped to be in 2002 -- or what Beijing expected when it regained control of the territory almost five years ago.

Policy makers such as Finance Secretary Antony Leung are certainly looking into how to reinvent an economy that's too reliant on exports -- and its proximity to China.

Investors, after all, fear Hong Kong is pinning too much hope on riding China's coattails. They also worry Hong Kong's high costs, relative to China's, will continue to encourage investment and trade to bypass the city altogether.

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