Hong Kong's purchasing managers' index (PMI) showed private-sector growth stagnated in February following 3 years of steady expansion, partly as new orders from the Chinese mainland stalled.

Economists said the data underlined the view that global demand is weakening following the US housing downturn and credit crisis that have roiled world markets.

For Hong Kong, Citigroup said the PMI suggested the trading center was facing its biggest challenge since the outbreak of SARS in 2003 despite the support of falling interest rates and handouts in last week's budget.

"Hong Kong will suffer falling export growth in coming months and household spending will receive weaker support from employment," Joe Lo, a Citigroup senior economist, said in a research note.

"Interest rate cuts and expansionary fiscal policy will prop up the economy in the near term, but their support will not last long if business activity and employment continue to dwindle."

Many economists believe the United States - Hong Kong's biggest export market after the mainland - is already in recession.

Hong Kong's currency is pegged to the US dollar, so the Hong Kong Monetary Authority is forced to adopt US monetary policy and follow the Federal Reserve in cutting interest rates.

In contrast to Hong Kong's PMI, retail sales figures on Monday showed that domestic demand, which is expected to drive economic growth this year as trade weakens, remains strong.

Sales in January surged 23.3 percent from a year earlier, the fastest annual pace in 11 months, although economists said the figures were inflated by pre-lunar new year shopping in early February.

"Trade is definitely slowing as the US market comes down," he said.

"But the Asian market is still doing well and domestic demand is still strong, so I'm not worried about the overall economic situation," said George Leung, a chief economist at HSBC.

Reuters

(HK Edition 03/04/2008 page2)