But while in the past such thinking has led to panic over possible competitive devaluations in the rest of the region, this time investors appear more sanguine. As Barclays Capital sees it, as long as Chinese domestic demand remains healthy, a devaluation should help the rest of Asia. The problem is that domestic demand in China is still in the dumps. In response, China's policies to promote spending appear to be getting more aggressive, especially a new 20 percent tax on bank interest income designed to get China's savers spending once more. The fundamental problem has not been resolved.
China lacks organic growth.
Without turning the private consumption around, it is only a matter of time before the government simply runs out of money,'' he said. Growth of any kind is what has been lacking in Hong Kong's economy until recently, but because of the currency's fixing to the U.S. dollar, interest rates in Hong Kong have to rise if American ones do, even if what Hong Kong's economy needs is lower rates. So even though the government has reported mild growth in the second quarter, real interest rates are actually rising as deflation worsens. Since the territory depends so heavily on property and banking stocks, that could be a problem if rates in the United States rise further. On the other hand, Hong Kong is as ready for Y2K as anywhere else in the world, and could benefit from money fleeing Thailand or China.