Microsoft word - typhoon season for world markets.docx
Whether or not we are finally at the bottom of what is now formally being
acknowledged as “the Great Recession” is hard to tell. After the shocking losses of the
past week, I know many in the markets who are praying so. But perhaps most
important, the events of the past week may finally mark the end of “policy fudge”.
If that is so, then this is a time to celebrate – not that the globe’s problems have been
solved, because of course they have not, but that Governments are at last poised to deal
with the core problems – cleaning up banks’ balance sheets, dealing with millions of
underwater mortgages, reining in on unsustainable public services, and – yes – raising
taxes, no matter what the Tea Party says.
For too long, policymakers have “kicked the can down the road” rather than
acknowledge or deal directly with the catastrophic consequences of the 2008 global
crash. They have believed, incredibly, that a large part of the crisis was psychological,
solvable with adequate doses of Prozac. To buy time – as the clinical Nouriel Roubini
noted this week – they have spent literally trillions of dollars pulling rabbits out of
hats – zero policy rates, QE1, QE2, credit easing, fiscal stimulus. They have prayed that
wounds would heal themselves, that a period on life support would in itself be
sufficient to enable recovery. As of last weekend, the time for rabbits came to an end.
It is now clear that Europe’s economies are in for several years of extraordinarily
painful adjustment. After the German-underwritten bail-outs and haircuts have been
administered, taxes will rise, government spending and services will be cut. Jobs are
going to be hard to find. Salaries for most mortals will stagnate or fall. Families will
over time have to adjust to the reality that they were never as rich as the bubble years
The US may not now default on its debts, but the brutal political mess involved with
averting default seems to have had a powerfully sobering effect – hence the market
crash, and the Fed’s stern promise of low interest rates for at least two more years.
Perhaps the stage is now set for dealing with the mortgage crisis that sits of the heart of
the global crash. With only modest potential for more Quantitative Easing, household
What does this all mean for us in Asia – in particular in China and Hong Kong, and for
our panicked investors in property and the stock market?
For China, and Hong Kong’s PRD-based export manufacturers, the export economy
must surely now stagnate, even though exports jumped by 20% in the first half of this
year. Beijing’s leaders must focus on domestic consumer demand, and on infrastructure
investment that is more carefully targeted than the RMB4 trillion released in 2009.
Growth in consumer demand could reasonably be sustained at 20% a year from current
low levels – which would boost consumer demand by about US$480 billion a year. That
is obviously not the kind of stimulus that can come from the US$10 trillion consumer
economies of Europe and the US, but it is not to be sniffed at.
After the tragic scandals linked to China’s high-speed rail development plans, and the
massive waste on unneeded property development, Beijing’s leaders will undoubtedly
need to think more carefully about how best to use government funds to stimulate
growth. But what about tax cuts for small businesses? What about more spending on
affordable housing? What about the pressing need for improved health care and
education provision? What about Chen Deming’s plan to ensure each of the country’s
380,000 villages is served by at least one small village store – giving millions of villagers
access to basic consumer goods for the first time?
China’s US$3.4 trillion of forex reserves will unquestionably erode in RMB terms as the
US$ steadily weakens, so the imperative remains to diversify the deployment of the
country’s reserves, and to accelerate the path of the RMB towards serving as a global
reserve currency. A rising share of China’s trade and investment will be concentrated in
the Asia-pacific region, and this should be encouraged.
For Hong Kong, we have no practical choice but to stick with the US$ peg arrangement,
at least until China’s currency is fully convertible. This has served Hong Kong well for
28 years, and will continue to do so, in spite of the inflationary consequences. After the
Fed’s commitment this week to low interest rates for at least two more years, we can be
sure that interest rates in Hong Kong will also remain low. With mortgages so cheap,
this will make housing by far the most sensible investment for Hong Kong families or
speculators: supply of new residential property is certain to be short for several years to
come, while demand continues to be driven by thousands of Mainland families, and
Mainland speculators, who are seeking a foothold here.
Life is likely to be more volatile in Hong Kong’s other main asset market – the stock
market. This is simply because global investors, in particular US and European
institutions, play such a powerful speculative role in our equity markets. In
fundamental terms, most Hong Kong stocks now seem to look cheap, with an average
p.e. of 9.4, so long term investors can perhaps move with reasonable confidence – but
expect a roller-coaster ride over the near future. Note that the world’s worst-performing
stock market so far this year has been Brazil’s Bovespa, down nearly 31% in spite of
boasting one fo the world’s most robust economies at present, and companies in
extreme good health. Like Hong Kong, Brazil is a highly liquid market in which funds
can enter and exit pretty much unfettered.
But other events of the past week provide Hong Kong – and perhaps China too – with
another more sobering challenge for the future. I’m talking of the astonishing riots
across London and other major UK cities - terrible reminders of the social tensions
unleashed as economies tumble into recession – one commentator called them “the
intifada of the underclass”. Huge divides between a community’s rich and poor may be
tolerated in boom times, but can explode in shocking violence as a recession unfolds.
What could be more chilling than the words of a 17-year-old London girl fresh from a
night of drunken rioting and looting: “It’s the rich people… It’s the people with
businesses. That’s why all of this happened. We are just showing the rich people that
As the global economy faces perhaps four or five years of slow and painful correction
after the excesses that exploded in 2008, even we in Hong Kong cannot neglect such
alarming signals of the potential for deep social unrest. Donald Tsang’s successor and
his or her Government ignore these signals at their peril.
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