Hong Kong and the market scare
SCMP March 19 2007
What is the apparent synchro- nisation of world stock markets telling
us? Does it reflect underlying realities? Or is it attributable to
those grossly overindulged sheep who manage the public's savings or
run the billions of dollars of gambling money which are the main source
of earnings for so-called investment banks.
How strong are the threads that cause sub-prime mortgage problems
in the US to shake markets from Seoul to Sydney and Sao Paulo? Does
Hong Kong really need to worry about the rapacious recent behaviour
of US mortgage sellers?
Here are some reasons why Hong Kong may need to worry.
Cross-border portfolio investment has been growing rapidly thanks
to the removal of barriers to foreign investment and currency exchange,
among other factors. Then there is the impact of vastly increased flows
of financial capital resulting from current-account imbalances - especially
the US deficit and East Asian and oil exporter surpluses. Money has
naturally flowed from low-interest, surplus nations like Japan to higher-interest,
deficit countries like the US and Australia.
The US mortgage problem will most likely lead to sharply lower US
economic growth and quite possibly a prolonged, if shallow, recession.
The sub-prime mess is probably just the tip of an iceberg of excess
household debt throughout the economy. Some of the US problems are
also to be found in Britain and Australia.
The sudden slowing of these western, global-growth engines will hit
manufacturing-export-dependent East Asia. That includes China, which
is currently also trying to rein in domestic demand, and commodity
producers from Russia to Brazil and Indonesia, who have benefited from
concurrent expansions in China and the US.
Here are some reasons why Hong Kong may not have to worry. Asian markets
vary widely in their current levels of valuation. Foreign interest
can have a very significant impact, particularly in the short term
and - in cases like South Korea and Thailand - where foreign ownership
makes up a relatively high proportion of heavily weighted stocks. The
differing valuations say more about domestic conditions, domestic investor
expectations, market structures and so forth.
Almost all Asian financial markets are highly liquid, and companies
as well as households have strong balance sheets. The credit booms
in the west have been made possible by Asian surpluses. The collapse
of those credit excesses will cost Asians dearly in terms of credit
institution collapses, bond default and a flight from the US dollar,
sterling, and so forth. But, on balance, cash-rich Asia will come off
much better. Indeed, a reversal of flows may, after a pause, see a
rebound of Asian cash into Asian markets.
At the very least, Asians will want to keep their cash in Asian currencies,
which reflect external strength. Maybe the whole world will follow
the US into recession: most Asian countries have the capacity - though
they may lack the will - to spend their way out of trouble. Even if
they do not, their assets look likely to retain their value better
than those in economies that can only escape debt traps in two ways:
promoting inflation in order to devalue debt, or risk bigger collapse
by keeping interest rates at today's still moderate, real levels.
The answer to the present quandary thus seems to be that major dangers
still lie ahead for most stock markets and the world economy. But with
the exceptions of the currently overpriced markets of China, India
and the Philippines, Asia is less in danger than western pundits like
to believe. Indeed, a wholesale shift of assets from the deeply indebted
Anglophone economies to cash-rich Asia looks as good a bet as one can
make in these turbulent times.
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