Hong Kong in peril from twin looming dangers

The collapse of its services industry and a substantial drop in demand from Asia are the greatest dangers faced by Hong Kong.

HSBC Global Research said both problems were more dangerous than a drop in merchandise exports or the loss of demand from the West. It said the fragile US recovery and China’s quickly decelerating economy make Hong Kong's economic outlook ever more vulnerable.

Another clear danger is the financial contagion from the Eurozone debt crisis.HSBC said there are three channels through which global financial turbulence can disrupt "business as usual" in Hong Kong: a sovereign rating change, abrupt changes in capital in/outflows and any knock-on impact on asset prices that subsequently derails domestic demand.

HSBC said its concerns revolve around financial contagion, especially if deleveraging by Eurozone banks escalates and the asset quality of Hong Kong's banking system suffers a substantial deterioration.

Should either occur, disruptions to Hong Kong's capital and asset market could threaten to derail the steady growth it has experienced since 2008, said HSBC.

Nonetheless, the bank said that even if Hong Kong slipped into recession again, it should bounce back faster and stronger this time provided, however, that China's economy expands by at least 8% in 2012.

It also said Hong Kong's banking system is more robust today and would suffer less of a hit than in 2008-09.

It also noted the Hong Kong Monetary Authority thinks any recession would not deal credit markets as big a shock as during the Asian Financial Crisis of 1997-98.