Inflation may deteriorate corporate payment performance--Coface

Study says Hong Kong is vulnerable to a sudden rise in risk aversion that could lead to a bust of the real estate bubble.

The total value of Hong Kong's exports showed significant year-to-year increase of 21.5% in March. For the first quarter of 2011 as a whole, the value of total exports of goods rose by 24.6% over the same period in 2010. The vibrant performance of the Asian economies and the gradual recovery in the US and EU should continue to render support for Hong Kong's export performance. Added to the satisfactory increase in export, both late and default payments experienced by Hong Kong enterprises are improving according to the Hong Kong payment survey conducted by Coface in the fourth quarter of 2010.

However, various incidents in 2011 Q1 bring uncertainties to the future growth. The Japan’s earthquake may bring negative impacts to Hong Kong export and the electronic industry is the first to be affected. Meanwhile, the surging inflation rate in China and the increasing oil price caused by the geopolitical tensions in the Middle East have boosted the production cost of local enterprises, according to a Coface report. 

“As high production cost may reduce profit margin, some of the local enterprises may face cash flow problem and have a higher risk of defaults. Besides, the tightening bank lending in China may affect the payment behavior of mainland enterprises. Local businesses are strongly recommended to closely monitor buyer’s payment record and financial situation in order to avoid unnecessary harm to company’s profitability and cash flow. ” said Richard Burton, Deputy CEO, Asia Pacific, Coface.

Furthermore, property market is buoyant and has to be closely monitored. The authorities do not have the room for maneuver in terms of monetary policy that other countries have. Capital controls are inconceivable for such a global financial centre. Besides, the exchange rate of the HKD has been pegged to the USD and interest rates are in line with US interest rates. Hong Kong is thus vulnerable to a sudden rise in risk aversion that could lead to a bust of the real estate bubble.