Ben Laurance
When Chris Patten was running Hong Kong, he was fond of dropping a smug little statistic into any conversation about the Hong Kong and Chinese economies. The colony, with six million people squeezed into a sweaty little corner of Asia, was about to achieve one-fifth of the economic output of its enormous neighbour to the north, with a population of 1,2 -billion or so, give or take the odd 100-million.
It was the best sort of statistic used in a debate. It wasn’t untrue. But neither did it give a full picture. This idea is based on the notion that the same amount of money will buy the same wherever in the world it is spent.
Of course, this is a nonsensical supposition. A secretary working for a multinational in Beijing and earning the equivalent of 6 000 a year would feel rich; one working for the same company in Basle would be on the breadline.
So if you correct for differing purchasing power between countries, the Chinese economy suddenly appears much larger. Putting right this distortion gives a very different picture: China probably accounts for around 12% of global economic activity. If this single economy grows at 8% in a year, this adds a full percentage point to the entire global economic output.
So China really does matter. And yet so far it appears to have remained aloof from the turmoil going on elsewhere around the Pacific Rim. Hong Kong has been in the headlines: last week, for a time, the Hang Seng stock market index dropped below 9 000.
And renewed speculation that the Hong Kong authorities will eventually have to concede defeat and allow the territory’s currency to be devalued brought fresh pressures on the foreign exchanges. Late last week, three-month interest rates in Hong Kong jumped to more than 14%.
The idea that China will have to devalue its own currency, the yuan, has until recently been discussed only as a vague possibility. But now pundits are taking a serious look at what the fallout would be if the yuan were allowed to fall.
It has happened before. At the beginning of 1994 — as China moved towards making its currency convertible by abolishing its two- tier exchange rate system — the international value of the yuan was effectively cut by a third. China became a favoured place in which to invest.
The effects of that devaluation are still being felt: new figures show how China’s competitiveness was boosted, with exports last year rising by 20% and imports by only 1%. In 1997, China’s trade surplus was $40,3-billion.
But the impact of faltering economies and collapsing currencies around the Pacific Rim is beginning to take its toll. The economy grew by 8,1% in the 12 months to the third quarter of last year — somewhat short of the 9% that had been looked for. And at the end of last week, the state planning commission issued a new forecast for economic growth in 1998. It had expected a rate of 8,8%, but cut that to 6%.
No one expects the yuan to be devalued right away: China has huge foreign exchange reserves with which to prop up the value of its currency.
But look further ahead. Imagine (not difficult) that the United States economy is going to slow this year. Imagine (which takes no imagining at all, because it’s patently true) that demand for Chinese goods from the rest of the Pacific Rim falls away. Imagine (ditto) that multinationals lose some of their enthusiasm for investing in China because the series of devaluations of South-East Asian countries have made those nations much more competitive places in which to do business. And imagine that domestic demand in China further slows.
If all these things happen, even China’s trimmed growth forecast may prove optimistic. And how will the Beijing authorities cope with that?
There is little scope for them to ease fiscal policy. So the obvious thing to do is to ease monetary policy. Yet that isn’t obviously consistent with trying to maintain the value of the currency. And, more to the point, keeping the yuan at a high level when the values of other currencies in the region have fallen so precipitately will put Chinese exporters at a huge competitive disadvantage, thus adding to the slowdown.
Predictably, the Hong Kong authorities at the end of last week were dismissing the upsets in the stock market as little more than a symptom of panic selling. And they reaffirmed their belief that the peg between the Hong Kong dollar and US dollar can be maintained.
The problem is that to do so will inevitably mean that Hong Kong exchange rates have to remain painfully high. Hong Kong’s prime rate was increased from 8,75% to 9,5% last October. And to 10,25% in January.
In the money markets, interest rates on three-month money have been heading upwards towards 15%. For an economy like Hong Kong’s this is acutely painful. It is reckoned that since the middle of last year, the price of housing has fallen by around 20%.
It is predicted that the impact of interest rate rises so far will reduce economic growth to below 3% in 1998, compared with about 5% in 1997.
The policy dilemmas faced by the mainland China authorities and their counterparts in Hong Kong are intimately intertwined. If the Chinese currency were to be devalued, the blow to the credibility of the Hong Kong dollar peg would be devastating.
In the past week, shares in mainland Chinese companies quoted in Hong Kong have been hardest hit, reflecting the concern that the yuan will eventually be forced down.
So is this to say that the yuan will have to be devalued? No — and even if that does happen, it won’t be for a few months. And the Hong Kong dollar? It looks safe for the time being — but if the yuan were to go, the 15-year-old system of the Hong Kong-US peg would surely collapse too.
But the devaluation of both currencies is now a real possibility rather than a vague fear. And in the meantime, the Hong Kong economy will take a beating.