HONG KONG — Despite Friday's partial rebound in stock prices here, the damage from the week's steep decline was already starting to make itself felt.
At a real estate office near the edge of Hong Kong harbor, phones were ringing with property sellers willing to cut their asking prices to raise cash quickly.
"Nobody wants to buy at this level," said Patrick Fung, sales manager for Midland Realty, describing new luxury developments that came to market this week that may stand empty for a while. "If interest rates go over 10%, we predict a 20% or 30% drop in the property market."
He was referring to the unavoidable consequence of the government's move to protect the currency: surging interest rates. Banks raised their prime rate from 8.75% to 9.5% on Thursday--which will ratchet up mortgage payments, batter the property market and slow consumption.
On Friday, some lending rates fell, helping to jump-start the rally. By Friday afternoon, the Hong Kong overnight rate that banks charge each other had fallen to 10% from 50% in early-morning trading, and down from 250% to 300% at the height of the crisis. Meanwhile, the dollar again held its value.
"The Monetary Authority has managed to stabilize the exchange rate and restore confidence," said Andrew Fung, the treasurer of the Commercial Bank of Australia. "The challenge ahead is to adjust market rates back to a more tolerable level. The economy cannot tolerate such high rates for too long."
Hong Kong leaders have declared that they will protect the currency's peg to the U.S. dollar--and the confidence in Hong Kong's economy that they believe it underpins--even if it causes the stock and property markets to suffer.
Letting some of the air out of the territory's inflated property market may even be good for Hong Kong, some analysts say. Many of Hong Kong's big developers concede that the real estate market is dangerously inflated.
High demand for the tightly controlled supply of land has made Hong Kong's rents among the highest in the world. Those costs make Hong Kong an expensive place to live, work or visit.
In addition to fueling inflation, the real estate crunch creates resentment among citizens who can't afford to buy--and concern about potential unrest. As one of his first moves when he took office July 1, Hong Kong's new chief executive, Tung Chee-hwa, launched a program to boost housing construction and make it available to more people.
"In recent months, there has been a collective anxiety attack about property prices' effect on Hong Kong's competitiveness," said Richard Margolis, head of research at Merrill Lynch. "There is evidence that the Hong Kong government is not worried about asset price deflation as a result of defending the peg."
But boosting interest rates and bringing down property values is a double-edged sword, particularly in Hong Kong, where 40% of government revenue comes from the property sector and about half of all bank loans are property related.
Thus by raising mortgage rates, banks are hitting their biggest borrowers--who could suddenly face difficulty making their payments. Higher rates mean fewer buyers and more bad loans. Thus it was no coincidence that financial and property companies took the hardest hits Thursday.
More than 60% of the companies listed on the benchmark Hang Seng index are real estate companies or major developers. And many others have a substantial portion of their assets in property.
The Hong Kong Assn. of Banks raised savings deposit interest rates Friday by 0.75 percentage points to 4.75%--a move widely expected after individual banks lifted their prime lending rates by the same margin Thursday, to 9.5%.
The big test will be property prices, said Colin Bradbury at Jardine Fleming. "The buyers will be staying away, and anybody who wants to sell is going to have to drop their price."
* HONG KONG SURGES: Hang Seng index gains 6.89%. A1 . . . Asian turmoil jolts Southland. A1