First Japan, now Hong Kong. The former British territory is about to plunge into recession for the first time since the 1980s, government officials say, with negative growth now widely anticipated for the second quarter.
On Tuesday Hong Kong chief executive, Mr Tung Chee-hwa, announced a HK$44 billion (£3.3 billion) stimulus package aimed at propping up the battered economy.
The government's main move was to suspend land sales to stem the drastic plunge in property prices. The sharp fall in property prices has destabilised the sector and the banks are tightening credit in the face of the increased risk in mortgages and continued doubts about the ability of the Hong Kong dollar to stay pegged to the US dollar. Property buyers were seeing the value of their assets fall to the point where they were experiencing negative equity.
Many analysts consider Mr Tung's intervention as bowing to pressure from the property developers, said Ms Maeve Gallagher, vice-president at UBS (Union Bank of Switzerland) in Hong Kong.
"Property companies are about 70 per cent of the Hang Seng index so they are more important here in Hong Kong than in similar developed economies." She added that in the long term the freeze on land sales could give a false sense of optimism to property buyers.
As an externally-oriented economy it was inevitable that Hong Kong would feel the ripple effect of the Asian economic crisis but after just a year in office as the Beijing-approved chief executive, Mr Tung is facing a crisis of confidence. The latest opinion polls show that people feel the last British Governor, Mr Chris Patten, did a better job.
The stimulus package was also prompted by political considerations, as opposing parties in the recently-elected legislative council were gearing up to make common cause in criticising the economic management of the government. Hong Kong's financial secretary, Mr Donald Tsang, delivered a sombre message to the six million inhabitants of the territory, saying he did not foresee any major turnaround this year. "We have forecast that, in the coming two quarters, there will not be any major improvements," he said on Tuesday.
The plan also includes measures to help small and medium-sized businesses, the freezing of top civil servants' pay, a lowering of diesel fuel duties, and loans to prospective first-time homeowners. But the package, which will turn a budget surplus of approximately £1 billion into a deficit of £2 billion, is also being seen as a painkiller rather than an attempt to kickstart the economy.
Hong Kong's willingness or ability to do that in the prevailing climate in south-east Asia is near zero, analysts say, and a Keynesian approach is contrary to the free-wheeling, low-tax traditions of the former colony. The principles of financial prudence and a linked exchange rate remain, said Mr Tsang. "We must show to the people of Hong Kong that we are doing our very best without forsaking these principles."
The pain the government is trying to relieve is growing. Hong Kong is suffering its first economic contraction in 13 years and unemployment has reached a 15-year high, described by Mr Tung as "critical". Every day brings more bad economic news. April retail sales sank by 16 per cent, the government announced on Tuesday. Clothing and footwear sales were down 30 per cent. On the same day the United States credit rating agency Standard & Poor's placed Hong Kong's sovereign ratings for long-term foreign and local currency which were A plus and AA minus on "credit watch with negative implications".
"Hong Kong entities face deteriorating debt-servicing ability and weakening financial flexibility," the agency said, citing high interest rates, tight liquidity and the prospect of a protracted recession. Next day it also put 13 Hong Kong companies on its watch list.
Hong Kong's helplessness in the face of the economic gloom was expressed by its treasury secretary, Ms Denise Yue Chung-yee. The stimulus package "is not a magic pill", she said. "Hong Kong is an externally-oriented economy. Ultimately it has to wait for the improvement of the external economy."
