View from City Road: Hong Kong takes stock of Patten

CHRIS PATTEN received plenty of plaudits for being clever. But has the Governor of Hong Kong been clever enough? The stock market will be judge.

The immediate impact was to add 36 points to the Hang Seng index, taking it to 5,589 at the close. But much depends on the Chinese reaction.

The Hong Kong branch of the official news agency accused Mr Patten of irresponsibility, but this was seen in London as predictable and little to worry about. Worse had been discounted by share prices. Analysts pointed out that the Chinese had advance knowledge of the proposals, so yesterday's response was probably carefully considered.

In Hong Kong, however, there were fears of a row with China ahead of Mr Patten's visit to Beijing in two weeks. A fortnight's slanging match could damage the stock market, notwithstanding Mr Patten's attempts to please multiple constituencies.

For share prices, much depends on the outcome of so-called Section 301 talks with the US. Washington has imposed a deadline of Sunday for China to drop what it says are unfair barriers to US exports, threatening to impose crippling tariffs under the US Trade Act.

The calendar holds several other dangers. Next week is the 14th Communist Party congress, and a week later Mr Patten goes to Beijing. It is enough to keep investors wary.

Nevertheless, the underlying strength of the economy remains intact. With inflation at 9 per cent and the dollar peg confirmed yesterday, real interest rates are negative and could become more so if US rates fall again. Domestic investors have every reason to buy equities rather than save. Companies find borrowing cheap.

Mr Patten predicted that gross domestic product would grow 5 per cent in real terms between now and 1997. This gives strong support to share prices which are trading on just 10 times prospective earnings for next year.

Given uncertainties over the territory's future, history may not be much of a guide; but the multiple was far higher in the Eighties, even at comparable growth rates. This means it is far too early to write off Hong Kong's stock market.

(Photograph and graph omitted)