The challenges facing HK' s next finance
SCMP July 25 2003
It is natural that at this moment in its history, Hong Kong should
be focused on politics. Contrary to the opinions of one-party-state
apparatchiks and businessmen who "abhor politics" so long
as their friends are in charge, politics is a generally healthy business
of apportioning power among interest groups and ambitious individuals.
That said, it may be time for people in Hong Kong to lift their gaze
from their navel and see what is happening in the world around them
that may be relevant in the not-too-distant future. That is especially
the case for whoever will be the new financial secretary.
Will Chief Executive Tung Chee-hwa choose a harmless placeman like the
temporary incumbent Stephen Ip Shu-kwan, in the expectation that he
will do nothing either in terms of policy or personal behaviour to make
himself and the government unpopular? Or can he find an individual with
sufficient vision, communications skills and public trust to make the
hard decisions from which Antony Leung Kam-chung shied away?
Sars may be behind us, the Chinese economy is almost back at full throttle
and the world economic picture is looking a little brighter. But Hong
Kong is still facing a structural fiscal deficit of at least 3 per cent
of gross domestic product. Mr Leung's budget proposals for dealing with
it relied largely on rose-tinted expectations of asset sales and medium-term
gross domestic product growth.
Hong Kong still needs a plan for more radical spending cuts and revenue
increases. Whatever they are, they will not be an easy sell. But selling
it will be a lot easier if the public can be convinced of the sense
of fairness, as well as wisdom, of the financial secretary, that he
or she is someone who is demonstrably not connected with major interest
groups. Hong Kong could do with, and would likely accept, a dose of
honest talk and some tough measures if Mr Tung's appointees and the
upper bureaucrats were themselves prepared to do their penance.
The international situation looks to have more bumps for Hong Kong.
Not all need be harmful. On the plus side, it is increasingly likely
that China will revalue significantly, whether with a formal change
or more likely a rapid adjustment via a trade-weighted basket. China
hates to be pushed - but it has been prevaricating on its exchange-rate
mechanism for too long.
An initial revaluation upwards of, say, 15 per cent would make economic
sense, would win political kudos around the world and would show China
to be the pacesetter in Asia. Others, such as Taiwan, Malaysia and South
Korea, would follow with their own adjustments to exchange regimes,
which would bring about further changes to the yuan's value against
the dollar on a trade-weighted basis. Over a year, one could expect
to see a rise of 20 to 25 per cent. Under this scenario, it would make
sense for the Hong Kong dollar to remain pegged to the US dollar for
the time being, improving competitiveness vis a vis the mainland and
Longer term, Hong Kong also needs to move to a new exchange rate system
which would accommodate the new realities in China and the increasing
future role of non-dollar currencies. But that can wait until the next
round of global currency adjustments - which began with the Euro and
Australian and Canadian dollars, but has stalled thanks to Asian intransigence
- is complete.
Escaping the dollar trap will be vital sooner or later. The major reason
why the fall in property prices has not caused more pain, or led to
the sort of mortgage defaults and bank collapses seen elsewhere in Asia
in 1997-99, has been the collapse in interest rates. Negative equity
is, as yet, mostly a theoretical problem. With property looking to remain
plentiful and demographics remaining unfavourable, it is imperative
that Hong Kong interest rates remain low. There are already signs that
US rates have bottomed out.
There is probably little danger of a significant rise in short-term
rates, to which almost all Hong Kong mortgages are linked. US Federal
Reserve chairman Alan Greenspan is clearly determined to pump money
into the economy, regardless of the consequences for the US dollar.
But Hong Kong's new finance chief will need to start thinking soon about
the future of the peg and, in co-operation with the Monetary Authority,
explore how best - and when - to abandon the peg.
A different and bigger worry could be if the US resorts to new forms
of protectionism to solve its trade problems. The New York Times may
have hinted at things to come in an article last week, linking the failure
of the US economy - to respond to huge doses of fiscal and monetary
stimulus - with globalisation. Consumers are still spending, but increasing
amounts are going on imported items. It is no longer just toys and garments,
or even electronic goods, which come from overseas. Now, services such
as computer programming and call centres are being outsourced. The world
may have seen globalisation as an American-driven phenomenon, but it
is beginning to bite the US. More people in America are beginning to
ask whether there should be controls on outward investment, at least
in more advanced industries. Proposals for restrictions on the importation
of services are also beginning to surface.
Major currency changes, if they come soon enough, may start to turn
the US trade situation around before the pressure for widespread protection
gathers political momentum. But the deficit is so large in proportion
to total trade that currency changes may be insufficient. Meanwhile,
there is an election in just 15 months. Although the Republican administration
is generally in favour of freer trade, the George W. Bush administration
is not one to let international trade rules get in the way of politically
advantageous unilateralist action to "protect America".
In short, the next financial secretary should commit to fiscal reform,
attack cronyism and monopolies and distance the administration from
business and family special interests. He or she must honestly outline
the challenges that Hong Kong faces, which cannot be cured by better
standards of governance - badly needed though those are.
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