Thu, Sep 19, 2002 page12

• Hong Kong keeps getting cheaper

  BUT AT A PRICE A post-handover collapse in real-estate prices sparked a deflation cycle which analysts see as a sign of economic trouble that has scared people out of spending

  • AP
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  "Cheap" is not part of the everyday vocabulary in Hong Kong, where Prada designer handbags are as ubiquitous as McDonald's brown bags. But it's becoming more familiar to the residents of this city.

  For decades, Hong Kong grew dramatically, its high-rises soaring ever higher in an economy based largely on property prices that had many thinking things could only go up in value.

  

  People walk past the Sogo department store in downtown Hong Kong yesterday. Falling prices might sound like welcome relief for Hong Kong, which remains one of the world's most expensive cities, but deflation is explained largely by a lack of demand.

  PHOTO: AP

  But they peaked not long after Britain handed Hong Kong back to China in July 1997, and Hong Kong has been painfully adjusting ever since to the idea that prices can also fall.

  Just ask Lau Awok-wah, who recently tried to boost business by slashing prices in her corner grocery store, cutting the cost of a cola to HK$5 (US$0.64) from HK$6 (US$0.77); to no avail. "People are clinging to their wallets," Lau grumbled.

  For almost four years, consumer prices have been dropping in a spiral of deflation that has defied Hong Kong's old belief in constant growth. But they haven't fallen far enough to put residents on a shopping spree, and analysts see the deflation as a sign of economic trouble that has many people scared to spend.

  "Hong Kong people are actually very rich, but they just aren't willing to shell out the cash," observed clerk Cathy Cheng.

  July marked Hong Kong's 45th consecutive month of deflation -- and no one is sure when it might end. The chief economist at Morgan Stanley Asia Ltd, Andy Xie, predicted it could persist for another four or five years.

  Two economic downturns since the former British colony was handed back to China in 1997 have pushed unemployment to a record 7.8 percent and left many people reluctant to spend.

  A post-handover collapse in real estate prices is a key culprit. It left many residents with apartments worth less than the balance on their mortgages. With people cutting back on spending for other things, Hong Kong's chances to resume healthy growth are also held back.

  "The pie is getting smaller," said Ho Lok-sang, head of the Economic Department at Lingnan University.

  Hong Kong's proximity to mainland China could keep the deflationary pressures in place for quite some time, Xie said. Thousands of Hong Kong residents travel to the neighboring city of Shenzhen in Guangdong province every day -- where they get cut rates for virtually everything.

  "They will always price themselves lower," Xie said. "They will always be creative in attracting demand from Hong Kong."

  Not far from Lau's store in Hong Kong's crowded Wanchai district, door-lock dealer Alex Lai says his small shop is also mired in the deflation blues.

  "It used to be if you wanted to renovate your apartment, when you had money, you would devote a lump sum and fix up everything, but now you might want to touch up certain things and not others," Lee explained.

  Hong Kong is a flashy city, where designer bags and Rolex watches -- real or fake -- are de rigeur for many. But although the brand names are still everywhere, many people are less willing to spend for a bit of extra prestige.

  "I only buy things if they are suitable for me," said accountant Stephanie Chiu.

  Moreover, shoppers are quite content to go to Shenzhen for tailored suits and Prada knockoffs that cost a fraction of what they would in Hong Kong.

  With no economic recovery in sight, many blame the government of Chief Executive Tung Chee-hwa.

  "Their decision-making is horrible," complained a manager at a food and beverage company.
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