Hong Kong's Economy Reeling From SARS Crisis

by Mary Swire, Tax-News.com, Hong Kong

21 April 2003

The deadly SARS virus is not just threatening peoples' lives in and around Hong Kong; it is undermining the region's fragile economy, leading to fears that the already bombed-out property sector will suffer a full-scale collapse.

A further 12 patients died in a single day at the weekend in Hong Kong, taking the death toll to 81, out of a total of 1,358 hospitalized.

The government says that the biggest local outbreak of SARS was spread in part by infected sewage that filtered through drains in one apartment building, and Chief Executive Tung Chee Hwa has set in train an emergency cleansing programme in the crowded territory of 6.8 million people.

With 26,000 apartment units unsold, property developers are beginning to panic, offering discounts of up to 15% on already bargain-basement prices. Major developers such as New World Development, Henderson Land Development, and Sun Hung Kai Properties are all offering substantial discounts or cash rebates. One analyst forecasts up to 20% falls in apartment values this year as developers intensify price cutting to shift their backlog. But bankers have called on the developers to hold their nerve and suspend sales until the health crisis eases and public confidence begins to return.

The Hang Seng index fell 1.1% on Saturday to 8,579, led by property companies, down an average 2.5%, and airline companies, with banks also under attack because of the threat of negative equity as property values fall. Personal bankruptcies rose 74% last month from last year's figure, and estimates of the number of negative equity cases range upwards from 100,000 families. Significant further falls in property values could rapidly inflate this figure, and banks' provisions would have to be increased by 30% or more.

Analysts were surprisingly unflummoxed, however. Herbert Lau Chung-kwan, research director at Celestial Asia Securities, told the South China Morning Post: "It's not looking too bad because most of the negative factors have been in the market for quite some time now. Presumably, Sars will not last forever and long-term investors are not that desperate to sell."

Small stock market brokerages, already a threatened species in Hong Kong, are being further damaged by the SARS crisis. By coincidence, a government working group on the future for small securities brokerages reported at the end of last week, saying that the Securities and Futures Commission wouls apply its new regulatory powers in a flexible way, while Hong Kong Exchanges and Clearing has already cut some fees from April 1 and would reduce others from May 2. The group also suggested that brokerages could help themselves by learning to sell other types of financial instrument, such as funds; but brokers' representatives were pessimistic, saying that many more small firms would shutter their offices this year.

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