Indeed, as we sit here worrying about it, there are people out there who are busy exploiting niches and opportunities which will mould the future structure of the economy. We can try to facilitate that process, or even to guide particular aspects which we reasonably expect to be important (eg the cyberport), but there will always be surprises. In any analysis of competitiveness there is inevitably scope for argument about the appropriateness of the statistics one is using. I believe that in the current Hong Kong conjuncture the popular measures such as the real exchange rate may have been lagging somewhat behind the recovery of competitiveness that may have actually occurred. Business decisions are influenced more by marginal prices and expectations of future prices, than by prevailing average prices; yet the measure of rentals which enters the CPI is typically based on an average of outstanding contracts and not the price at which new contracts are being struck which have over the past year or so fallen much more steeply. Thus, when thinking of business decisions, even assuming that residential rentals are a satisfactory proxy for rental costs affecting business, some adjustment for the marginal/average discrepancy may be needed at times when that discrepancy is significant - as it certainly is when one is at or near turning points in the rental cycle.
On top of that, the marginal/average adjustment for rentals to which I referred earlier would have tended to raise the realised real rate even further, because the prices influencing business decisions probably fell by more than the CPI. In sum, what started as a headline real rate of 3.3% ended up as a rate well in excess of 10½%. Businesses would have been affected by the factors responsible for the difference between these figures, but would not have been able to anticipate all of them. If we move on to April this year, the position is rather different. The backward-looking real rate, which tends to be the one which most people take as their guide when clamouring about oppressive monetary policy, is indeed high at 8.9% - again taking 12-month HIBOR as the base. But because expectations are that prices are now going to move up rather than down, the forward-looking measure, based on consensus forecasts (from the private sector) of what the published CPI will show, yields much less, 5.6%. In addition, the marginal/average adjustment may now have turned the corner, since business decision-takers may be facing prices that will rise by more than the recorded CPI, in which case real interest rates will now be perceived as lower than 5.6%. Perceptions may still be of a figure which is above the 3-4% range, which is often regarded as a global norm; but perceptions vary, and there may be some who visualise a lower figure.