By Keith B. Richburg
Washington Post Foreign Service
Tuesday, June 23, 1998; Page C01

HONG KONG, June 22—Conceding that the Asian economic crisis has had a more severe impact here than first expected, Hong Kong's leaders today said the territory was heading into a recession, and they unveiled a stimulus package aimed at reviving the economy and stemming a huge downward slide in property prices.

Chief Executive Tung Chee-hwa, who announced the stimulus package in a television address to the territory's 7 million residents, said the regional economic meltdown that began a year ago has proven "more devastating than anything we had known before."

"The effects of the turmoil are more serious and far-reaching than we have anticipated," Tung said. He cited high interest rates, a debilitating credit crunch, the highest unemployment rate in 15 years, collapsing stock and property markets and a tourist industry he said was "shrinking."

"All Hong Kong assets have been devalued and shrunk to a large extent within a few months," Tung said in his most somber assessment yet of the territory's economic straits. "Every sign points to the fact that negative economic growth will likely continue in the second quarter. The unemployment rate will probably continue to rise, and the economic situation for the second half of the year is hardly optimistic."

Tung's bleak analysis, and the announcement of the stimulus package, was yet another sign of the depth and severity of the regionwide meltdown. Once touted as a "miracle" model of growth and development, East Asia has in the course of just 12 months come to be identified as a region with millions of new unemployed people, bankrupt banks, piles of bad debt and a fraying social fabric.

Ho ng Kong was once thought to be an island of financial stability amid the regional turmoil. Its currency is firmly pegged to the U.S. dollar, so the territory avoided the round of devaluations that swept through Asia last year. Its banks are generally considered healthier than elsewhere. And its now-departed British colonialists left behind an effective legal system and a professional civil service that have largely spared Hong Kong from the problems of corruption and nepotism that are common across the region.

Today, however, Tung conceded that some of the current problems "can also be attributed to the internal factors in our own economy." He said the spiraling land prices, high wages and high inflation of recent years had created a "bubble economy."

The bubble, particularly in the property sector, made Hong Kong the most expensive city in the world, surpassing even high-priced Tokyo by some estimates. But since the Asian crisis found its way here earlier this year, it seems the bubble has finally burst.

Property prices have fallen an average of 40 percent -- leaving apartments here still priced astronomically high by world standards but much lower than the level of one year ago. Many people who made down payments on $1 million apartments now find the value of those units has fallen so low, and interest rates have risen so high, that they can no longer afford their hefty mortgage payments.

The fall in property prices also is dragging down the Hong Kong stock market, because the blue-chip Hang Seng index is weighted heavily toward property companies.

"Over a period of six months, a fall of that kind is traumatic," said Sir Donald Tsang, the financial secretary. "It's affecting daily life."

To help stem the fall and shore up the market, the government is taking the unprecedented step of suspending its own land sales until next March. Auctioning off costly land to developers is a key revenue-earner for the government, but holding onto land now can help keep the land supply restricted and bolster prices. Tsang told reporters that this marked the first time he was aware of that government land sales had been suspended.

Calling property a "precious commodity," Tsang defended the unusual intervention, saying it was not intended to shore up property prices for big developers but merely to help stabilize the market after a fall that many felt was too far, too fast.

"We do not want our land disposal program to aggravate the fall in property prices," Tsang said. "What we are trying to do, in fact, is stabilize the market, restore people's confidence."

Suspending land sales means the Hong Kong government now faces a budget deficit for the current fiscal year.

Other measures announced today include more government loan guarantees to small and medium-sized exporters, more loans for first-time home buyers, a property tax rebate and a 30 percent cut in the tax on diesel fuel to help taxi and bus drivers. Tung also announced that he and more than 300 other top civil servants will forgo any pay increase this year.

Another new government measure will exempt interest payments on deposits from taxes on corporate profits. Officials said they hope granting this exemption will bring in some $25.8 billion in corporate money that is being kept out of Hong Kong by companies seeking to avoid the tax. Getting this money back into Hong Kong, they said, would improve the liquidity of the banks and help ease the credit squeeze.

As the new economic measures were announced today, the territory was hit with more bad news. The latest figures showed tourist arrivals for the first five months of this year are down 23.4 percent from last year. The number of tourists from Japan -- a key source of revenue for Hong Kong -- was down 54 percent this year from 1997, and the number of visitors from Southeast Asia dropped 33 percent.

The stock market, which was closed before the announcement of the stimulus package, dropped another 4.5 percent, down 388 points to 8,204, mostly becaus e of concerns that the Japanese government was not doing enough to reform its economy and that the troubled yen may resume its downward slide following last week's U.S.-led intervention in the currency markets.