By Lim Say Boon, Director at OCBC Investment Research in Singapore. (The opnions expressed are his own.)
THE TALE OF TWO CITIES (revisited) is a sorry one. In the mid-1990s, the comparisons were of the strategic advantages of the two cities in the race for more growth, wealth and international status.
If you were to hold the two cities up against each other today, the comparison would be of which fared worse in the misery stakes.
And while the short answer to that question would appear to be Hong Kong, in terms of unemployment, the severity of the slide in the residential property market and recovery in gross domestic product – there is little joy to be had in Singapore either.
Yes, unemployment in Hong Kong is running at 7.7 per cent for the second quarter of this year; up from 7.4 per cent in the first quarter. Unemployment is milder in Singapore – at 4.1 per cent in the June quarter, easing back from 4.5 per cent in the March quarter. Singapore’s gross domestic product is showing quarter-on-quarter growth, while Hong Kong’s economy is still sliding. And in that all-important residential property market, Singapore prices – some 35 per cent lower than where they were in 1997 – are hinting at a possible modest upturn later this year. But prices in Hong Kong – half where they were in 1997 – are still showing no signs of revival.
But nobody in Singapore will be cheering. Notwithstanding academic details of who is suffering more, both cities are still shivering under the long shadow of China. Both Singapore and Hong Kong, with high cost bases built up years ago by their respective property bubbles, are vulnerable to further Middle Kingdom-driven deflation.
Both cities’ misery may be traced to a couple of common sources. The first has to do with China’s devaluation of its currency in January 1994 – abandoning its official exchange rate it floated the yuan at 8.7 to the US dollar, effectively devaluing its currency by 33 per cent against the greenback. Arguably, that was the start of a chain of events which sank the baht – triggering the Asian Crisis of the late 1990s. And today, five years on, most of Asia, ex-Japan, is still dealing – to a greater or lesser extent – with the hangover from the currency devaluations, deflation, bad debts, and sluggish growth.
Indeed, both Hong Kong and Singapore’s present difficulties are continuations of events triggered in 1994. The yuan devaluation accentuated China’s export competitiveness, and accelerated its development as the “Factory of the World”.
Southeast Asia was an accident waiting to happen. Many productive and viable companies were abruptly bankrupted from just the impact of the currency disruption on their debts.
As Singapore’s trading partners in Indonesia, Malaysia and Thailand sank, the impact was felt immediately in the city’s expensive tourist shops in Orchard Road, in the lower cargo volumes being handled at the port, a grinding halt to high-end property sales to rich Indonesians, and eventually, negative GDP growth. The Singapore dollar also absorbed part of the adjustment process by weakening against the greenback. Hong Kong, with its dollar pegged to the greenback, was spared the shock of currency adjustment. But it paid back in a currency that made it even less competitive.
This last point is particularly ironic. Singaporeans had been worried about Hong Kong having the strategic upper hand in the race of China-related business by virtue of its proximity to the mainland.
The irony is of course that China might prove a double-edged sword for Hong Kong – simultaneously dangling the carrot of business opportunity while deflating the economy.
Another source of difficulties for both Singapore and Hong Kong is the property bubble that developed through the 1990s. High property prices affect competitiveness in almost every imaginable industry. So the Singapore government consciously let the air out of the property bubble back in 1997 – little knowing its efforts would be given a huge push by the Asian Crisis later that year.
And indeed, push became shove, and residential prices are still about 35 per cent below where they were before the slump in 1997. That has compounded the problems caused by the global technology slump. Singapore, being heavily dependent on electronics exports, has seen unprecedented retrenchments. Combined, these two factors have severely dampened consumer sentiment. One senses the government is wary of pushing its old agenda of further deflating the property bubble.
Hence, when Deputy Prime Minister Lee Hsien Loong recently announced changes to limit the amount of any home loan that home-buyers could finance from their Central Provident Fund accounts, he also cushioned the impact by halving the cash deposit for home purchases to 10 per cent.
In both cities, political leaders are being closely watched for their ability to lead their citizens out of their respective ruts. Singapore has had the good fortune of not having had any major faux pas as the economy strains to get on its feet. Certainly, it has not had to deal with the likes of the penny stock debacle that has further damaged sentiment in Hong Kong. And there have been no demands for the sacking of politicians or bureaucrats.
Nonetheless, Singaporeans are privately asking if Lee Hsien Loong and his cohort of younger leaders have the smarts to meet the competitive challenges posed by China.