Identifier
Created
Classification
Origin
06HONGKONG2166
2006-05-24 10:27:00
UNCLASSIFIED//FOR OFFICIAL USE ONLY
Consulate Hong Kong
Cable title:  

ECONOMIC COOLING SEEN AS CHINA TIGHTENS, CONCERNS

Tags:  ECON PGOV HK CH 
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VZCZCXRO5562
PP RUEHCN RUEHGH
DE RUEHHK #2166/01 1441027
ZNR UUUUU ZZH
P 241027Z MAY 06
FM AMCONSUL HONG KONG
TO RUEHC/SECSTATE WASHDC PRIORITY 6880
INFO RUEHOO/CHINA POSTS COLLECTIVE
RUCPDOC/USDOC WASHDC
RUEATRS/DEPT OF TREASURY WASHDC
UNCLAS SECTION 01 OF 02 HONG KONG 002166 

SIPDIS

SENSITIVE
SIPDIS

STATE FOR EAP/CM AND EB
TREASURY FOR OASIA GKOEPKE
STATE PASS USTR
USDOC FOR 4420

E.O. 12958: N/A
TAGS: ECON PGOV HK CH
SUBJECT: ECONOMIC COOLING SEEN AS CHINA TIGHTENS, CONCERNS
MOUNT ABOUT U.S. INTEREST RATES, AND STOCKS TUMBLE

(U) THIS DOCUMENT IS SENSITIVE BUT UNCLASSIFIED. PLEASE
PROTECT ACCORDINGLY. NOT FOR RELEASE OUTSIDE U.S. GOVERNMENT
CHANNELS. NOT FOR INTERNET PUBLICATION.

SUMMARY/COMMENT
---------------

UNCLAS SECTION 01 OF 02 HONG KONG 002166

SIPDIS

SENSITIVE
SIPDIS

STATE FOR EAP/CM AND EB
TREASURY FOR OASIA GKOEPKE
STATE PASS USTR
USDOC FOR 4420

E.O. 12958: N/A
TAGS: ECON PGOV HK CH
SUBJECT: ECONOMIC COOLING SEEN AS CHINA TIGHTENS, CONCERNS
MOUNT ABOUT U.S. INTEREST RATES, AND STOCKS TUMBLE

(U) THIS DOCUMENT IS SENSITIVE BUT UNCLASSIFIED. PLEASE
PROTECT ACCORDINGLY. NOT FOR RELEASE OUTSIDE U.S. GOVERNMENT
CHANNELS. NOT FOR INTERNET PUBLICATION.

SUMMARY/COMMENT
--------------


1. (SBU) Hong Kong's 8.2 percent first quarter GDP growth
caps off two years of impressive and above-trend economic
performance, but this is likely to change quickly. The boost
to Hong Kong's economy from China's growth appears set to
wane amid determined moves in the mainland to slow loan
growth and avoid overheating in specific sectors. Meanwhile,
there is widespread concern here that U.S. interest rates
will continue to rise. Since the Hong Kong dollar is pegged
to the U.S. dollar, this implies further local hikes as well
which would cut into the all-important property market as
well as the disposable incomes of the many Hong Kongers who
have adjustable mortgages. Finally, the stock market here
has fallen nearly 9 percent since its recent May 8 peak, and
any sustained correction could have a negative wealth effect
that would dampen consumer sentiment. END SUMMARY/COMMENT

ANOTHER UPSIDE SURPRISE
--------------


2. The HKG announced May 23 that Hong Kong's first-quarter
year-on-year GDP growth was 8.2 percent, significantly
outpacing analysts' forecasts. Below are key year-on-year
economic figures from the first quarter economic report
released by the HKG; we have provided selected trend
commentary:

(percent)
1Q06 4Q05 2005

-- GDP GROWTH 8.2 7.5 7.3

o Official HKG forecast for 2006 is now 4-5 percent.

-- UNEMPLOYMENT 5.2 5.3 6.1(1Q)

o Unemployment is at a 4 1/2 year low.

-- INFLATION 1.6 1.3 1.0

-- MERCHANDISE EXPORT GROWTH 14.4 11.4 11.2
-- MERCHANDISE IMPORT GROWTH 14.0 12.0 8.6

o Most Hong Kong trade activity is re-exports involving the
mainland.
o It is significant that exports continue to grow at a
double-digit rate against what was already a strong base.

-- SERVICE EXPORT GROWTH 8.9 8.2 8.7

-- SERVICE IMPORT GROWTH 4.8 2.3 2.9

o Service exports include revenues from tourism, an area
where growth had recently flattened but is now coming back.
Business-related services are also expanding.

-- PRIVATE CONSUMPTION GROWTH 4.5 3.4 3.4

o Reflects sustained optimism, at least until recently, in
the face of higher interest rates and energy prices.

-- INVESTMENT SPENDING GROWTH 8.5 8.4 4.1

o Business capital spending is up significantly but
construction was down 8.7 percent for the quarter.

LIKELY END OF IMPRESSIVE GROWTH FIGURES
--------------


3. (U) Since recovering from the SARS outbreak in 2003, Hong
Kong's economy has consistently registered growth rates above
7 percent. Several analysts whose views we follow agree that
a significant slowdown is inevitable, if only because it is
difficult for an advanced economy like Hong Kong's to keep
building upon such an impressive expansion. In step with
this view, the HKG declined to raise its overall 2006
forecast from its current prediction of 4 to 5 percent,
implying that we could see a fall from 8.2 percent in the

HONG KONG 00002166 002 OF 002


first quarter to a run-rate of around 3 percent for the rest
of the year.


4. (SBU) Three events that have occurred since the first
quarter ended are likely to contribute further to Hong Kong
slowing down. First, the stock market has tumbled
dramatically, with the Hang Seng Index falling nearly 9
percent since May 8, a correction that many saw coming and
believe will have a negative effect on consumer sentiment.
Second, China recently raised interest rates, imposed
administrative controls on lending, and signaled a
determination to take further measures as needed to check
overheating in sectors like steel and cement. Finally, there
is a growing concern here that U.S. Federal Reserve interest
rate hikes may not pause as many anticipate, with even the
head of the monetary authority recently warning the
legislature that "it does not look like a peak is forming
yet." This is significant for consumer sentiment in Hong
Kong because local rates generally rise and fall in line with
U.S. rates as a result of the currency peg. Since many Hong
Kongers have adjustable mortgages on their already expensive
properties, any hint of rising interest rates generates
significant anxiety here.

KEY FINANCE AND TRADE SECTORS VULNERABLE
--------------


5. (SBU) Standard Chartered China Economist Tai Hui believes
that mainland tightening could have a significant effect on
Hong Kong's financial markets, particularly as individual
firms are hit by specific austerity measures. Citibank
Senior Economist Joe Lo shared with us his more broad-based
and gloomy assessment, focusing on how Hong Kong's most
important sectors are trade facilitation and finance and
observing that U.S.- and China-related trends are the primary
factors in determining future growth in these areas.
Anticipating a slowdown in the U.S. and persistence by China
in avoiding economic overheating, Lo predicted that Hong Kong
would see significant impacts in trans-shipments and in
financial market turnover, both of which are important to the
business volumes of many locally-based companies.
Cunningham