Hong Kong generally optimistic on economy

85% of Hong Kong respondents in the survey expect it to register growth in GDP for the year.

There is a general optimism about the economic outlook on the Chinese Mainland and in Hong Kong, although a systemic failure of the banking industry in North America/ Europe and a potential deterioration in non-performing loans and credits are seen as the underlying threats for the ongoing economic recovery, according to the latest joint survey by Deloitte China and CPA Australia.

The survey covering close to 300 completed online questionnaires in September to November 2010 assesses senior executives' view on the impact of the global financial crisis on the economy and business environment as well as their views on the economic outlook of the Chinese Mainland and Hong Kong. The survey also explores companies' approaches to weather the financial storm and their perspectives on the restructuring and insolvency regimes on the Chinese Mainland and in Hong Kong. Survey respondents included senior executives on the Chinese Mainland, in Hong Kong and other Asian regions.

According to the survey, around 96% of respondents believe that the Chinese economy is in recovery; over 58% of respondents expect a 5-10% GDP growth in China in 2010, and around 23% expect a growth of above 10%. For Hong Kong, over 85% of respondents expect it to register growth in GDP for the year. In relation to economic recovery, there is a stronger optimism towards the Chinese Mainland than Hong Kong: over 50% of the respondents expect a full recovery to pre-crisis level for China's economy by the second half of 2011, compared with only approximately 38% in the case of Hong Kong.

Consistently, respondents show optimism about the performance of stock and property markets, the leading economic indicators which provide insights about future economic activity. Around 63% of the respondents consider that the Shanghai Stock Exchange Composite Index will lie within a range of between 2,500 and 3,499 points by the end of 2010, while around 60% of respondents expect the Hang Seng Index to lie within 20,000-24,999 points by the end of 2010. For the real estate market, around 75% of the respondents expect property prices on both the Chinese Mainland and in Hong Kong to remain at a similar level as currently, or even rise, in spite of the restrictive measures imposed by the respective governments to stabilize the property market.

The survey also studied the perception of business executives towards the outlook of corporate failure in Hong Kong, as it is another effective barometer of local economic conditions. Over 75% of the respondents expect that the number of compulsory windings-up in 2010 will not exceed the peak of more than 1,200 companies that was reached during the SARS outbreak. After the SARS crisis, the number of compulsory windings-up gradually dropped to around 450 companies in 2007 before rising again to around 570 companies in 2009.

"It looks like respondents generally considered the impact of the financial crisis will not be much more severe than previous regional economic downturns, such as the Asian Economic Crisis in 1997/1998 and the SARS epidemic in 2003. However, we should not underestimate the impact of some underlying risk factors, especially with regard to loan quality and the health of the global banking system," said Mr. Derek Lai, Asia Leader of Reorganisation Services, Deloitte China.

With regard to risk factors, the respondents consider that over 5% of the newly approved loans from China's RMB4 trillion stimulus package will become non-performing in China, against the current non-performing loan ratio of less than 2% among the major banks in China. In addition, respondents also consider the consumer credit crisis, possible systemic failure of the banking systems overseas and natural disasters as some of the most imminent threats to continued recovery in China. For Hong Kong, respondents are most concerned about the systemic failure of banking systems overseas, consumer credit crisis and the sovereign debt crisis in Portugal, Italy, Ireland, and Spain.

To deal with economic uncertainty, Mr. Darach Haughey, Principal of Reorganisation Services of Deloitte China, said companies should constantly review and assess their business, while monitoring their cash positions and maintaining good relationships with banks to avoid liquidity difficulties. Equally important is adopting proper risk management strategies, such as avoiding relying on a small number of major customers or suppliers. If necessary, companies should consider divesting themselves of their non-core or underperforming assets or businesses, and channeling surplus cash into suitable investment opportunities.

"Companies should also not feel shy about going through a business restructuring, which can help improve the performance of financially healthy but underperforming companies. In case of a corporate collapse, companies should seek to continue their operations, so that they will have a better chance to revive the business. They should work together with different stakeholders, such as management, lenders, creditors, shareholders and employees to come up with a mutually acceptable corporate rescue plan. To achieve the best results in restructuring and corporate rescue, companies should leverage the experience and expertise of external professionals," Mr. Patrick Yeung, Chairman of Financial Reporting & Corporate Governance Committee, CPA Australia – Greater China said.