hong kong's hotel industry—the post-hand-over blues

Hong Kong's Hotd The P0st-Hand-0ver Blues

by William Hsu

Hong Kong's tourism industry has suffered a series of devastating

blows in the last 15 months, with Asia's current financial crisis

being perhaps the most serious of all.

B e g i n n i n g in July 1997, when Hong Kong reverted to Chinese rule and became a Special Adminis- trative Region (SAK), hopes were higher than ever for the continued prosperity ofHong Kong's tourism industry. Millions of tourists were slated to visit Hong Kongjust before, during, and long after the ac- tual political hand over. As the most popular destination in Asia, Hong Kong's future as a stopover for lei- sure travelers and business people looked bright.

For existing hotel owners, the immediate future looked even brighter. An unprecedented demand

William Hsu, M.P.S., is a principal lecturer in the department of hotel and tourism management at the Hong Kong Polytechnic University.

© 1998, Cornell University

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for Hong Kong office space gave hoteliers the option of continuing lodging operations or selling out for handsome profits to those developers who would dismantle or convert the hotel to make way for offices. 1 As hotels were being demolished and replaced by commercial buildings between 1994 and 1995, the hotel-room supply-and-demand balance shifted dramatically, result- ing in exceptionally high occupancy and the opportunity to raise ADRs. 2

On top of that, in 1996 tourists topped the 12-million mark for the first time, spending US$1,000 million in Hong Kong. In just the first six months of 1997 tourists spent another US$550 million--an increase of 17.9 percent over the same period a year earlier. Even a conser- vative estimate put the projected earnings from tourism for 1997 at a record US$1,200 million. 3

Instead, however, after July 1, 1997, the bottom dropped out of the Hong Kong tourism industry. Murphy's Law applied in every as- pect to China's newest SAR, although the hand over itself had little if any influence on the problems that arose before or afterward. In fact, one could argue that being part of China has actually helped Hong Kong during the last 15 months or so, since China's economy has been hurt the least by the region's events thus far. Still, it's true that the entire world economy has been shaken by the downturn of Asian economies in 1997 and 1998, especially those

1William Hsu and Robert O'Halloran, "The Hong Kong Hil ton--The Case of the Disappear- ing Hotel," Cornell Hotel and Restaurant Adminis- tration Quarterly, Vol. 38, No. 4 (August 1997), pp. 46-55.

2Industry-wide, room occupancy for Hong Kong hotels was estimated to be 93 percent in 1997. See: Hong Kong Tourist Association, "Boom Days for Territory," South China Morning Post (Hong Kong Review), January 13, 1997, p. 30.

3Edward Peters, "TheYear of Holiday Hand- outs," South China Morning Post (Travel Section), January 2, 1997, p. 17. Note: 1,000 million equals one U.S. billion.

Exhibit 1 Chronology of economic events in Southeast Asia, July 1997 to January 1998

Date of event

July 2,1997

July 8,1997

July 24,1997

The Bank of Thailand effectively devalues the baht by 15 to 20 percent.

The rupiah starts to crumble. Jakarta widens its rupiah trading band to 12 percent, from 8 percent.

The rupiah, baht, and ringgit slump, as confidence in the region rapidly deteriorates.

August 14, 1997

October 6, 1997

October 8, 1997

October 31, 1997

November 5, 1997

January 6, 1998

January 11,1998

Indonesia abolishes its system of a managed exchange rate; the rupiah plunges.

Rupiah hits a low of 3,845 (dropping from around US$1 = 2,000 rupiah).

Indonesia says it will ask the IMF for financial assistance.

Indonesia's IMF package is unveiled. It provides for as much as US$40,000 million in aid. Front-line defense is US$23,000-million.

IMF approves a US$10,000-million loan for Indonesia as part of its massive intemaUonal package.

Indonesia unveils its 1998-99 budget, projecting a 32.1-percent increase in revenues and expenditures over the current budget, and a 4-percent economic growth rate. The rupiah loses half its value during a five-day period, breaking through the 10,000 level (US$1 = 10,000 rupiah).

The IMF's first deputy managing director, Stanley Fischer, arrives in Jakarta for talks about the IMF's program and how to move ahead with it.

January 15,1998

January 23,1998

IMF managing director Michel Camdessus and President Suharto sign an agreement strengthening economic reforms.

Financial markets discount revised budget, rupiah closes at 13,250 against the U.S. dollar.

Note: 1,000 million is the same as one U.S. billion.

Source: Business Post, South China Morning Post, January 17, 1998, p. B1.

of Southeast Asia. In this article I attempt to examine what happened and what can be done.

Asia Financial Meltdown The countries of Southeast Asia benefited in the past decade from their reputation as popular tourist destinations, especially Indonesia, Taiwan, Thailand, Singapore, Malay- sia, Korea, and Hong Kong. Known as the "Tigers" or "Dragons of Asia," these countries experienced tremendous business growth from the mid-1980s through the 1990s. All was not as it appeared, however, and the first sign of a crack in the well

of prosperity became evident in early July 1997, when the Bank of Thailand devalued the baht by 20 percent. Other Asian countries shortly followed suit by devaluing their own currencies, with Indone- sia leading the way (see Exhibit 1).

Understandably, Hong Kong's economy is closely tied to that of the rest of Asia. When any one of those countries' economies turns sour, Hong Kong's stock market, the Heng Seng, responds and reacts negatively as well. Among the 10 countries listed in Exhibit 2, the stock-market value lost during the 12-month period July 1997 to June

October 1998 • 87

Exhibit 2 S.E. Asia stock-market values, 1997 to 1998 (in US$millions)

June 1997 June 1998 Percent change

China $ 201,000 $ 210,000 +4.5%*

Hong Kong 552,000 284,000 -48.5% Indonesia 106,000 12,000 -88.7%

Japan 3,124,000 1,929,000 -38.3%

Korea 153,000 41,000 -73.2%

Malaysia 269,000 74,000 -72.5%

Philippines 74,000 31,000 -58.1%

Singapore 140,000 74,000 -47.2%

Taiwan 335,000 253,000 -24.5%

Thailand 63,000 21,000 -66.7%

Total $5,017,000 $2,929,000 -41.6%

*Note the relative strength of China's economy in the region, which may confer positive effects on Hong Kong's financial situation following the hand over.

Source: Apple Daily, June 26, 1998, p. A3.

Exhibit 3 Heng Seng Index highlights, June 1997 to June 1998

T- ........ r L July 2, 1997--Thailand devalues baht August 7, 1997--Market peaks at 16,673 August 28, 1997--Index down 4.23% October 23, 1997--Index falls 1,211.47 points October 28, 1997--Index falls to 1997's lowest point December 31, 1997--Index closes year at 10,722.76 January 12, 1998~lndex continues to slide, to 8,121.06 February 18, 1998~lndex rallies on budget tax cuts March 19, 1998~Zhu Rongji's speech, National People's

Congress, sparks buying March 25, 1998~Five-month high, at 11,810 April 2, 1998~lndex falls as regional currencies weaken April 3, 1998---Japanese stocks fall sharply April 24, 1998---Index bows to selling pressure April 28, 1998--Index follows Tokyo slide June 15, 1998.--Index falls to 7,462.5

i i ¸ i i . . . . . . ~ i ...... 2 . . . . . . i •

June 16, Aug. 1 Sept.12 Oct. 24 Dec. 5 Jan. 16 Feb. 27 Apr. 10 May 23 1997 1997 1997 1997 1997 1998 1998 1998 1998

1998 was approximately US$2.9 million million (see Exhibit 2).

Local Business and Finance For the past 50 years Hong Kong has capitalized on its real-estate and finance (stock-market) values. The territory has existed within a bubble economy based on those two factors, especially for the last decade. When the Asia financial crisis hit Hong Kong's neighboring countries, Hong Kong's investments in those countries collapsed.

Due to the speculative nature of some of the Hong Kong investments, many financial-investment companies collapsed, including Per- egrine Company, one of the largest in Hong Kong. Others, such as CA Pacific, followed soon after as a result of mismanagement and corruption, causing investors to lose millions.

Meanwhile, as had happened with other Asian currencies, the Hong Kong dollar was attacked by overseas currency speculators, and Hong Kong officials were under tremendous pressure to devaluate the dollar. To fend offthe speculators, local banks raised their interbank borrowing rates, sending the interest rates on commercial loans and mortgages sky high.

Once confidence in a government's economy is shattered, its entire financial framework begins to fail. So it was that the Heng Seng Index took a nose dive. From an all-time high of 16,673 points on August 7, 1997, the index plunged to 7,462 points in June 1998--a 55-percent drop (see Exhibit 3).

Throughout the last quarter of 1997 Hong Kong's economic indicators spiraled down: unemployment, business failures, and negative GDP all pointed to a recession--a notion that was inconceivable just a year earlier. Exhibit 4 shows the top-10 Hong Kong economic indicators in September 1997 compared to June 1998.

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As a result of the business downturn, many Hong Kong businesses axed hundreds of workers in a des- perate attempt to remain profitable or to just stay afloat. Nevertheless, with such a decline in the overall economy, it was no surprise that rising unemployment and the result- ing cut in consumer spending led to many bankruptcies.

Those sectors that took a huge blow include the retail and service industries, where many jobs fall into the low-wage and low-skill catego- ries. In a service business, human resources may be the only area where cuts can be made (unlike manufacturing industries that might choose to sell offinventory). Among Hong Kong's hotels alone, more than 1,750 jobs were lost during the period December 1997 to March 1998. 4 Also, during early 1998, Cathay Pacific Airways eliminated 1,870 jobs; Duty-Free Shoppers, 400 jobs;Jumbo Seafood Floating Res- taurant, 100 jobs; and Maria Bakery & Fast Food Restaurants, 400 jobs. 5

Real-Estate Crunch Time Hong Kong's scarcity of land has always meant that real estate there can command a premium price. In some years it has not been unusual to have apartments in Hong Kong sell for US$600 to US$700 per square foot. Similarly, commercial office space in the Central District has rented for US$85 per square foot, while premium retail space commanded US$200 per square foot. It seems to me that investors' speculative dependency on Hong Kong's real estate has been a problem since the British colonial days, and has caused Hong Kong to be one of the most expensive places in the world to do business.

In the early and mid-1990s, when there was a great demand for Class-

4EconomicTimes, March 10, 1998, p. 21. Slbid.

Exhibit 4 Top-ten economic indicators, 1997 versus 1998

Index

Heng Seng Index

Situation in September 1997

Situation in June 1998

Percent change

15,049 (9/30/97) 8,204 (6/22/98) -45.5%

Housing cost* Kowloon: Whampoo US$1,097 US$579 -47.2% HK: Tai Koo Shing US$1,067 US$619 -42.0% New Territories US$563 US$323 -42.7%

Interbank borrowing rate 8.75% 10.0% (6/22/98) +1.3%

Prime rate 7.4875% 8.875% (6/22/98) +1.4%

Monetary reserves +0.2% US$3,715,000 million (3/98)

US$3,708,000 million

Unemployment rate 2.2% 4.2% - - (7/97-9/97) (3/98-5/98)

Inflation rate 5.6% 4.7% (4/98) - - . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . ~ . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

GDP 6% (third season) -2% (first season) - -

Total export US$156,000 US$130,000 -16.9% million (4/97) million (4/98)

Business income US$24,000 US$21,100 -11.8% million (3/97) million (3/98)

Tourist count 1,030,449 (3/97) 766,482 (3/98) -25.6%

* Average price per square foot.

Source: Oriental Daily, June 26, 1998, p. A1.

A office space, especially on Hong Kong island and in the Central Dis- trict, developers and owners of hotels rushed to tear down hotels lo- cated in those prime locations to build in their place commercial office buildings. 6

With that push for commercial development, there is now a glut of office buildings, with even more office space being constructed or currently under development. Given today's economy, oversupply of Hong Kong's office space is imminent.

Residential values. Office buildings aside, when the economy is down, residential-real-estate devel-

6Hsu and O'Halloran, pp. 46-55.

opers who are cash strapped rush to get rid of their inventory by cutting the prices of apartments--perhaps by as much as 30 to 40 percent. Yet, at the same time local banks jack up their interest rates high enough to ward off currency speculators. In this case, mortgage rates fluctuated from a low of 9 percent to a high of 13 percent. As a result of the erratic banking policies, confused potential buyers ended up waiting on the sideline, while shocked homeowners witnessed a steep drop in their homes' values.

To make things worse, there is no fixed mortgage rate in Hong Kong. Plus, new-apartment buyers must deposit 30 percent of the purchase price as a down payment, which is

October 1998 • 89

Exhibit 5 Hong Kong hotels" average occupancy and ADR, 1991 to 1997

• = Occupancy • = ADR (HK$)

90%

85%

80°A

75%

70%

65%

1991 1992 1993 1994 1995 1996 1997

,500

,200

900

600

300

Source: Ming Po, March 5, 1998, p. B4.

For comparison, HK$7.75 = US$1.

usually due months before the completion of the apartment, some- times as much as a year in advance. Now, with the escalating interest rates and drop in property values, banks are lending only against the current value of apartments and not the original, sold-as values. Since most developers will hold buyers to the purchase contract's original terms and price, many new- apartment buyers are forced either to come up with the incremental amount to cover the shortfall or forfeit the 30-percent down payment--an amount that may repre- sent their entire life savings.

Understandably, the drop in real- estate prices sent the stocks of the listed real-estate companies to an all-time low. To minimize their

losses, developers slashed 30 to 40 percent off the asking price of their apartments, thereby initiating an all- out, cutthroat price war among developers.

Hong Kong's Tourism Disaster Hong Kong's tourism crisis stems from several contributing factors, some of which are described in more detail below. These are an imbalance between room supply and demand, stafflayoffs and other cost-cutting measures, revelations of unfair hotel pricing for Japanese tourists, ineffective national promo- tional campaigns, airline woes, and food-borne illnesses that affected the restaurant industry and scared away additional visitors.

Supply and Demand Back in 1993 the supply of hotels was down, relative to demand, and demand for hotel rooms was continuing to grow. Partly as a result, ADR was growing by more than 10 percent per year, and those who saw that as an opportunity began to construct hotels, including in secondary sites (since premium sites had already been slated for office buildings). Today, with the tourism business having dropped off, it is apparent that there is going to be not only a glut of office buildings but of hotel rooms as well. The Hong Kong Tourist Association estimates that there will be some 43,744 rooms by 2000 versus an inventory of 33,491 in 1997, or more than a 30-percent increase. 7

Since the brief period before the July 1997 hand over when Hong Kong's hotel industry experienced a gush of visitors who paid top dollar for hotel rooms, s its tourism industry has hit bottom. Average room rates have dropped below 1991 lev-

~ South China Morning Post, January 23,1997, p. B3.

SHsu and O'Halloran, pp. 46-55.

90 ~ORN[[I HOTEL AND RESTAURANT ADMINISTRATION QUARTERLY

els, to a range ofUS$25 to $38 per night. Exhibits 5 and 6 indicate the drop in Hong Kong's room occu- pancies, average rates, and visitors.

Japanese-tourist Rip-off On top of everything else, a visiting Japanese journalist, Akiko Kato, discovered a vast price discrepancy between the rates charged to Japa- nese and non-Japanese visitors in several Hong Kong hotels. To her dismay she discovered what others in the Japanese community had long suspected:Japanese tourists are charged a higher rate than are those guests from other countries.

Her article in Mainichi Shimbun, Japan's third-largest newspaper, caused an immediate uproar. 9 Hong Kong government and industry leaders blamed hotels' complex pricing policies for such confusion, and tried to dismiss the problem out of hand. 1° For damage control, executives of Hong Kong's hotel and tourism industry flew to Japan to clarify things and launch a major campaign to lure disillusioned Japa- nese tourists back to Hong Kong. Nevertheless, due to Japan's own recession, its citizens curbed much of their outbound travel. As a result, Japanese-tourist arrivals to Hong Kong declined by as much as 64 percent. 11

Rate-cutting and Layoffs One of Hong Kong's most presti- gious hotels, The Peninsula, saw its average occupancy drop to 44 percent in February 1998, the lowest in more than a decade. The rate in January 1998 was 52 percent, so the

9Akiko Kato, reporting in Mainichi Shimbun, October 17, 1997, pp. 3-4.

l°Charmaine Chan andVivian Chiu, "The Great Tourist Rip-off" Sunday Morning Post (Agenda), October 19, 1997.

~At the same time, Korean visitors to Hong Kong dropped by some 74 percent. See:Alison Smith, "No Great Place for Bargains, but the Trams Are Fabulous," South China Morning Post, April 26, 1998, p. B4.

year started offwell short of the hotel's long-term occupancy rate of 75 to 85 percent. 12 Similarly, profit for the hotel company Shangri-La Asia dropped almost 32 percent in 1997, from HK$1,090 million to HK$743 million, as the economic crisis in Asia devastated occupancy rates for its 13 properties in the region. 13

Bad Promotions The Hong Kong Tourist Association (HKTA) has, in the past, received complaints regarding its promo- tional policies and campaigns. For example, its festive "100 Days of Wonders" campaign was supposed to encourage hand-over visitors to extend their stay. Instead, the pro- motion cost US$2.6 million and fell flat. Previous campaigns also were plagued with problems, such as the unsuccessful "Wonders Never Cease" campaign, launched in 1995 and costing US$9 million, intended to take Hong Kong up to and through the hand over. Another example is the slogan "Stay an Extra Day," which was criticized for sug- gesting that everything could be squeezed into just an extra day. TM

Time will tell if 1998's campaign, "We Are Hong Kong--Ci ty of Life," costing US$15.9 million and further supported by an additional US$6.45 million to boost it, can bring in the positive results required to revive the tourism slump.

Added attractions. Exasperated by the lack of response to its campaigns, HKTA is also focusing on additional infrastructure, theme parks, and casinos. Those plans include controversial projects such as US$813 million spent for Expo

12"Peninsula Occupancy at 10-year Low, South China Morning Post, March 9, 1998, p. B2.

13Andrew Chetham, "Shangri-La Turnover Up 7.9 Percent as Profit Dips," South China Morning Post, March 26, 1998, p. B3.

14Rachael Clarke, reporting in South China Morning Post, March 25, 1998, p. P19.

Exhibit 6 Number of tourists, 1997 compared to 1996

Number of Compared visitors, 1997 to 1996

January 988,000 +12.3% February 834,000 +5.9% March 1,000,000 +8.8% April 1,040,000 +18.0% May 977,000 +8.0% June 789,000 -14.1% July 658,000 -35.2% August 819,147 -24.4% September 732,000 -22.4% October 850,000 -20.7% November 792,892 -22.0% December 700,000* -22.0%*

*Estimated

Source: Ming Pao Dai/y, October 26, 1997, p. A4.

October 1998 ,, 91

economic programs and won't

interfere in the SAR's politics.

2001, to be built on the site of the retired Kai Tak Airport (in lieu of a possible Walt Disney Hong Kong);15 and Film City, to be constructed for US$258 million in Ma Wan, under the Tsing Ma Bridge. 16

Airline Woes In 1997 environmental problems combined with the economy to curtail air travel to Southeast Asia. First, in 1997, severe forest fires in Indonesia caused air pollution and other negative atmospheric conditions that blanketed most of South- east Asia, including the neighboring countries of Singapore and Malaysia. Enhanced by factors relating to El Nifio, the haze and hot, dry air from the fires ruined many tourism pros- pects in those countries and, of course, air travel.

Second, economic conditions caused a slump in overall tourism activity and resulted in fewer intra- regional and international tourists flying. When that happens, about the only thing that airlines can do is reduce costs by dropping some routes and laying off employees. Consequently, all airlines in the Asia region suffered tremendous losses.

For example, despite an aggres- sive marketing campaign, 17 Hong Kong-based Cathay Pacific Airways ended up laying off a total of 870 employees (with another 1,000 announced) as its 1997 profits slumped 55.5 percent, to US$218 million. Earnings were further hurt by an exceptional loss ofUS$48.3 million relating to severance payments to the laid-off staff members. 18

ls"CrunchTime Comes for Expo 2001," South China Morning Post, June 8,1998, p. P3.

16As reported in: South China Morning Post, March 4, 1998, p. 3.

~TSee:"Tourist Fares Slashed," South China Morning Post, November 15, 1997, p. P5; and "Cathay Ofer Hit by Flu Fear," South China Morning Post, January 8,1998, p. P6.

ISKeith Willis, "Cathay to Slash Staffby An- other 1,000," South China Morning Post, May 3, 1998, p. B1.

In June 1998 Indonesia's domes- tic airline, Sempati Airlines, declared bankruptcy. On June 16 Philippines Airlines laid off 5,000 employees (out of its total of 13,500, or a 37-percent reduction) and declared a loss ofUS$194 million for the year. 19

F&B, Health Concerns The economy's failure also coin- cided with a food-safety scare that greatly reduced restaurant traffic and probably discouraged some potential visitors. Moreover, a spokesman from the Hong Kong Restaurants and Catering Manage- ment Association predicted that, within the year, 500 restaurants will close and approximately 10,000 catering and restaurant-related employees will lose their jobs. He cited high labor costs, stiff competition, the government's waste-water sur- charges, and food-contamination scares (detailed below and in Ex- hibit 7) as all contributing to the slump in restaurant business. 2°

Blemished birds. The government halted imports of live poultry in December 1997 and ordered all 1.4 million local chickens killed to stamp out the so-called "bird flu," the H5N1 virus that crossed over to humans, killed six people, and raised fears of an epidemic.

Foul fish. More than 135 people got sick from eating deep- sea coral fish contaminated with heavy metals. Dozens more indi- viduals came down with cholera after eating undercooked mollusks imported from Thailand.

In May 1998 officials caught a seafood vendor pumping unpotable sea water into his fish tanks, and also shut down a restaurant when diners caught cholera after eating raw lobster as sasimi, a Japanese delicacy.

19Apple Daily, June 16, 1998, p.A24. 2°Economic Times, April 29, 1998, p. A21.

92 ~O~N~LI HOTEL AND RESTAURANT ADMINISTRATION QUARTERLY

Fish and shellfish were declared unsafe when a red tide (i.e., oxygen- depleting, fast-breeding algae) hit Hong Kong waters, killing half of the territory's farm fish.

Poisoned pork. On May 5, 1998, pig offal, a popular dish, was effectively banned after nine people became ill following a meal of pig's lung soup. In pig-lung samples from China, officials found traces of clenbuterol, a prescription drug used in some countries to treat asthma in humans. Some mainland Chinese farmers are believed to add the drug to pig feed to produce leaner pork.

Bad beef. Health officials confis- cated 840 pounds of beef from three shops in June 1998 after the fatal 0157 strain ofE. coli was discovered at a nearby slaughterhouse.

Despite all the above, becoming a vegetarian in Hong Kong is no solu- tion, either. Vegetables from China are regularly found to have too many pesticides. 21

At the height of the health con- cern, the panic engendered in neighboring countries by the chicken flu and other regional health concerns resulted in the media discouraging tourists from visiting Hong Kong altogether. Moreover, Hong Kong visitors to some other countries (e.g., Philippines, Taiwan, and Thai- land) were subject to medical exams if they showed signs of illness.

Personally, I believe that the current crisis is as good a time as any for hospitality businesses to focus on environmental concerns as a way to avoid the penalties, social costs, and stigma associated with improper waste-water handling and oil and grease pollution, all of which are serious ongoing problems among tourism-sector businesses in Hong Kong. In the long run, tourism businesses that operate in an ecologically sound manner could save money and attract more business.

21CNN News (on the internet), May 7, 1998.

Exhibit 7 Food-related health concerns

Bird Flu The mass slaughter of 1.4 million chickens and other fowl was ordered, and a ban on all chicken imports from mainland China was imposed in December 1997 after four deaths from the avian flu, or the H5N1 virus.

Cholera Cockles from mainland China and Thailand were feared to be behind an outbreak of cholera in February and March 1998. Thai health chiefs denied that toudsts from Hong Kong had contracted cholera; instead, they thought the tourists were just suffering from severe diarrhea.

Coliform Bacteria In May 1998 a strain of potentially fatal E. coli was found in beef samples from a meat shop at Shek Wu Hui Market, Sheung Shui, and traced by Hong Kong Health officials to a private slaughterhouse in Yuen Long, New Territories.

Listeria In December 1997, 115 tons of recalled Dreyer's ice cream was dumped at a government landfill, All Dreyer's products were recalled after two Cookies 'N Cream bars were found to be contaminated with the bacteria Usteria.

Pesticides In November 1997 three people suffered pesticide poisoning after eating Chinese chrysanthemums.

Red Tide With the discovery of toxic algae in red tides, health officials warned in April 1998 against eating shellfish. The deadly species--Alexandrium excavatum, which can attack the spinal nerve system and may be fatal in large doses--was found in samples at three beaches and hit approximately 80 percent of the fishes in Hong Kong.

Source: "Trouble on Our Plate," South China Morning Post, March 16, 1998, p. 2.

The Crystal Ball Economic recovery is likely to take a minimum of three to five years, at least for Hong Kong. Moreover, any improvements are highly dependent on the development and recovery of the rest of the countries in the region.

A seemingly critical stage was reached on June 20, 1998, when the United States government intervened concerning the Japanese recession with a US$2,000-million loan, hoping to help revive the Japanese economy and thereby the rest of the Asian countries. At first sight, it appeared to help, but the next day, the Japanese yen continued to drop and one of Japan's long-term credit banks declared bankruptcy. By August 11, the yen

October 1998 • 93

had hit an eight-year low against the U.S. dollar. 22

Drast ic measures . On the local front, on June 22, Tung Chee-wah, Hong Kong's chief executive, dramatically announced a HK$44,600 million (or US$5,750 million) economic stimulus package, in an attempt to revive the SAR economy. Proposed measures include the following. 23

• Suspend land sales until March 31, 1999, and freeze grants for sandwich-class housing. 24

• Provide HK$33,600 million (or US$4,300 million) to double to 12,000 the number of first-time home-buyers benefiting from a starter-loan program; and HK$3,300 million (or US$426 million) to increase from 4,500 to 10,000 the number benefiting from a home-purchase program.

• Exempt from the profit tax any interest earned locally, aiming to provide an extra HK$200,000 million in liquidity for the banking sector through repatriation of offshore deposits.

• Set up a HK$2,000-million (or US$258-million) program to help non-export-related small and medium-size businesses to obtain loans.

• Offer rate rebates (i.e., property- tax refunds) of HK$3,850 (or US$500 million) for the first quarter of 1998.

• Cut the duty on diesel fuel by 30 percent.

• Reduce by HK$200 million (or US$26 million) annually the charges paid by importers and exporters.

• Freeze the pay for 331 directorate

22US$1:147.35 yen; New York Stock Exchange and AP News Service.

23 South China Morning Post, June 23, 1998, p. P1.

24"Sandwich class" housing refers to dwellings aimed at families with monthly household incomes of no more than HK$70,000 (or about US$9,000) and total assets of less than HK$1.5 million.

officials, plus those of Tung Chee-wah and senior staff from the judiciary, ICAC, and subsi- dized sectors. Projected annual savings are approximately US$9 million. Those measures are intended to

stem the tide of decreasing land values and to help stimulate the money supply coming from the banking sector. Notwithstanding those initiatives' chances for success, the day after Tung Chee-wah's an- nouncement, Standard and Poor's placed 13 of the top Hong Kong conglomerates on its list for pro- spective credit-rating downgrades.

Silver Lining Unlike its neighbors, Hong Kong is in relatively good shape. As of this writing, none of its banks have failed, and no commercial office buildings stand totally vacant. Nei- ther are there workers' strikes nor double-digit inflation. Hong Kong's price-value for goods and services remains one of the highest in the region. While other countries' currencies dropped 30 to 40 percent or more, Hong Kong's currency is holding its own. With this strong performance, however, Hong Kong has priced itself out of the market in terms of production costs and other logistics. As a result, Hong Kong now has the reputation of being Asia's most expensive place in which to work and conduct business. Exhibit 8 illustrates the point. As if to drive the point home, on June 29, 1998, Geneva's Corporate Resources Group ranked Hong Kong's cost-of-living index tops in the world. 25

Hong Kong still has a strong monetary reserve, which should help the SAR weather this crisis better than those countries that are much worse off. Moreover, China has announced that it would sup-

2SOriental Daily, June 29, 1998, p. A20.

port Hong Kong's economic programs, without dipping its hands into the SAR's politics. So with that assurance and strong United States support, the storm should eventually be over for Hong Kong.

What to Do? During the peak of 1993 through 1995, when developers saw a short- term benefit in tearing down hotels to build commercial office buildings, almost all jumped on the band- wagon. Consequently, the shortage of hotel rooms created two situations for hoteliers. One was the tempta- tion to jack up room rates 50 to 70 percent, in view of the approaching hand over and the continuing surge in demand. The other was to build more hotels, even in secondary- market sites, to satisfy the short-term demand. Both of those options were pursued, but the timing could not have been worse.

Shortly after the hand over, the Asia crisis began and countries fought hard to gain foreign cash. When that happened, SAR hotel operators resorted to drastic price- cutting to gain occupancy at the expense of competitors, sending room rates plunging. Looking back, moderation in rate increases and decreases ought to be communicated among operators to ensure some stability in the lodging market.

It appears that there is a great need for better coordination between the Hong Kong Tourist Asso- ciation, a government-sponsored body responsible for promoting Hong Kong, and the rest of the industry in setting realistic goals and objectives. There is a great need for financially viable tourist attractions and facilities, yet many of the existing plans are overly simplistic and short-term in nature, such as those listed below: 26

26As reported in: South China Morning Post, June 3, 1998, p. 8.

94 EHRNELL HOTEL AND RESTAURANT ADMINISTRATION QUARTERLY

T O U R I S M

Exhibit 8 Weakening of ~.long Kong's competitiveness

Hong Kong Jakarta Seoul Shanghai 1997 17,183 4,709 19,206 3,457 1998 20,053 2,566 13,710 4,332 ~ !i!iiRentii(ardt~!!i~!~iiscpJami:meter!for class,A o~¢ei ~gdinge)

Hong Kong - - Seoul Shanghai 1997 985 - - 720 696 1998 1,069 - - 506 517 P ~ ; ~ e C h ~ e e

Hong Kong daka~a Seoul Shanghai 1997 267 100 121 66 1998 267 100 76 66

Bangkok N/A

4,232

Bangkok Singapore 257 954 125 689

Bangkok Singapore 102 129 59 108

Note: Calculated in U.S. dollars. Source: Economic Times, February 16, 1998, p. A18.

• Build a foreigners-only casino; • Open the governor's house; • Start a flea market on Tamar site; • Build an exhibition and museum

honoring martial-arts film star Bruce Lee;

• Allow private developers to build a cruise-ship terminal at North Point;

• Allow private developers to develop Fisherman's Wharf at Aberdeen;

• Build the proposed Film City theme park at Ma Wan, near Tsing Ma Bridge;

• Use a cable car to carry 2,000 tourists from the new airport to Big Buddha, on Lantau Island;

• Reduce the airport tax from HK$100 to HK$50; and

• Sign 12 new air-service agree- ments, to reach a total of 40 by the end of the year. More consultation with and in-

volvement by all sectors of the industry should yield better options and ideas than those just outlined. Moreover, the new US$20,000- million Chek Lap Kok Airport and its modern transportation arteries should offer Hong Kong an added competitive edge in attracting those international tourists that plan to visit the region.

Education and training. In- dustry executives should consider increasing or at least maintaining the quality of services and training already present, even with fewer staff members and in the face of low employee morale. Now, ongoing hospitality education and prac- tical training need to focus on the current needs of the industry and the best way to compete in the shifting market. Bear in mind that Hong Kong hotels are competing for the tourist dollar not only among themselves but with those in Singapore, Malaysia, and Thai- land as well. From this perspective, increased service quality, attractive price value, reliability of products, and employee attentiveness are critical to retaining guests' loyalty and patronage.

Once it recovers from the current economic turmoil, Hong Kong's tourism industry and its hotel sector should be wiser and stronger. The change of sovereignty should attract more mainland Chi- nese tourists, thereby lessening reli- ance on the traditional mix of Japa- nese and European visitors. As such, extra and special efforts should be exercised to cater to those potential new guests, fl0

Epilogue On August 28, 1998, the Hong Kong govemment spent US$10,000 million (or $10 U.S. billion, over HK$70,000 million) in one day of trading on the Hong Kong stock market to buy some of the leading local blue-chip stocks and thereby stem a strong wave of selling? One of the funds dumping Hong Kong stocks was the Quantum Fund, run by George Soros.

That day's record-shattering tum- over volume was US$10,200 million (or HK$79,000 million), equivalent to almost US$1,548 for every man, woman, and child in the SAR. After the trading closed, and although the Hang Seng Index dropped only 1.17 percent to 7,829 points, the govemment confirmed that the SAR was in a recession. 2

Since then many financial experts have debated whether the Hong Kong government should intervene in stock trading or let supply-and-demand pressure take its course. Nevertheless, it was clearly a do-or-die situation for the stock market on August 28, as the market could have plunged 40 percent had the govemmant not intervened.

Will the Hong Kong govemment intervene again if a second wave of selling occurs in the future? And what will happened with all those millions of shares of stocks now being held by the govemmant? What will happen to the stock market when they are sold? Will there be any Chinese involvement?

There are no easy answers. Since late August the SAR government (through its Monetary Authority) has tightened or implemented additional legal processes that, it is hoped, can protect the stability of Hong Kong's financial markets.

Meanwhile, many of the world's other economies are also at great risk, such as those of Russia, Brazil, and Argentina, while economic declines in Japan and the rest of Asia continue as well. Coupled with political turmoil in Indonesia, Iran, Afghanistan, and parts of Africa, circum- stances seem to be snowballing toward a cdsis of worldwide proportions. Solutions will require international cooperation, a concerted global monetary effort, and years of patience to overcome the problems.--B.H.

1 Since the Hong Kong govemment's unprecedented move into the stock and futures markets on August 14, it has spent more than HK$100,000 million, which is about 15 pement of the SAR's monetary reserves.

= South China Morning Post, August 29, 1998, p. 1.

October 1998 • 95

hong kong's hotel industry—the post-hand-over blues

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