Economic outlook: Hong Kong21 January, 2008, 4:27. Posted by Zarathustra
Tags: Economy, Hong Kong
Hong Kong is a strange case.
Our government like bubbles. They want to get the liquidity from the Mainland China to our stock markets, saying that it is to help our country to solve the problem of excessive liquidity. Our government also have no sense that economy needs some sort of control. Our economy is almost too good now, GDP grows strongly, people spend much in festive seasons, and we really see a scene of big prosperity in Hong Kong.
Despite this, the government really has no intention that the economy needs some measures to prevent overheating. John Tsang JP, the financial secretary of HK government, is talking about how to "return the wealth to the fellow citizens" in planning his first budget address, which probably would include tax cuts or rebate. If you were a Keynesian, you would recognize that this would simply increase the aggregate demand, making the economy even overheating. Yes, our government actions were always pro-cyclical. Remember that in 2003, because our government thought that the speculators would bet that Hong Kong would abandon the currency peg, so that the government thought that we need more money to defend the currency peg. As a result, despite the already weak economy, the government proposed raising taxes (which also unfortunately brought the "Lexusgate" scandal to the financial secretary at the time, Anthony Leung, who is now at Blackstone group).
Fiscally, our government have not learnt from the past mistakes of making pro-cyclical fiscal policy. Monetarily, we also have troubles. Thanks to our currency peg system, which was built at the time that China was negotiating with UK for the return of sovereignty of Hong Kong, our monetary policy is very inflexible in the sense that what we can do is to follow what the Federal Reserve do, because our currency is pegged to the US dollar. If US cut rates, we have to follow. We know how this made our economy overheat and suffered. Years after the 1997 Asian Financial crisis, While US is having very good economy so that they have to raise rates, we were having really bad economy, but we were forced to raise rates in order to maintain the currency peg. Now, we are facing the reverse situation. In the face of the subprime crisis, US has entered into the phase of rate cutting, while our economy is currently almost too good.
What would be the result? Inflation, and overheating the economy. We have already seen the prices increase in various products and services, thanks to the rate cutting and the depreciation of Hong Kong dollar (together with the US dollar, thanks to the currency peg). With the inflation of China, we are importing more inflation, especially in products like food (not to mention the rapid appreciation of the Chinese currency Remenbi). We have also seen the rise of asset prices, like real estates, which has been a rare phenomenon after the real estate market broke down in 1997. But our government, probably as a keen advocate of free market, has not do anything, and will not do anything too, except thinking about how to spend the large budget surpluses. Yes, we do have large budget surpluses, but I wonder if measures such as tax rebate or tax cut would be a wise actions to use the large surpluses. Only taxpayers would have the chance to have tax rebate, but the people who will suffer most will be the less well-off individuals and family, in which their income has not increased as much as inflation, and they do not have chance to get exposure to any asset price increase as the rich people do.
I think I am not going to make any policy advisory or suggestion to the government. Without any measures to cool down the economy, we will see overheating economy in Hong Kong, and probably bubbles in stock and real estate markets. History repeats itself. We will probably see a exaggerated prices of stocks and house in coming one or two years, and then a sharp decline after the bubble burst, as we have seen in 1997. Without the sense of the need to control, our economy will be very volatile, like roller coaster.