August is always a difficult month for financial markets. This year it brings special concerns and uncertainties.
Yes, I am afraid it is August again, that troublesome month for financial markets in Hong Kong. No, I am not a superstitious person. It is simply that investors are in the habit of reviewing their investment strategies on the basis of half-year results. August is a month when disappointment is translated into market action. And when sentiment is one-sided, sharp changes can occur with a momentum that can be destabilising to individual markets.
Readers may be aware of the fact that every month we in the HKMA make an internal assessment of the risks and vulnerabilities that we face, to assist in our work in the maintenance of monetary and financial stability. This assessment is discussed in meetings of the Sub-Committee on Currency Board Operations of the Exchange Fund Advisory Committee; the records of these meetings are published. Obviously, in the maintenance of monetary and financial stability in an open and highly externally oriented international financial centre, we need to be alert to developments in international finance, particularly to those developments that may have a specific impact on Hong Kong.
As we move into August, the world economic situation still seems rather gloomy. The outlook for the US economy can, at best, be described as murky. Recovery is not yet in sight, although much hope is still pinned on the recent monetary easing and tax cuts. Inventory adjustment, earlier believed to be a relatively short one, given the greater use of information technology in production processes, is still on-going, and the end is definitely not yet in sight for the adjustment in the information technology sector itself. And so weak corporate earnings will probably continue to cause market disappointment and put pressure on equity prices, with consequent adverse wealth effects on consumption. There are nevertheless some brighter spots shinning through the murky water - continuing private consumption growth and subdued inflation. This situation in the US is affecting investment sentiment in Europe, where, additionally, investment and employment are being affected by weakening business confidence. The Japanese economy offers little hope of respite in the near term and trouble is brewing in Latin America. All in all, this is a rather potent environment that encourages volatile and destabilising movements in financial markets globally.
Whether we like it or not, Hong Kong, an international financial centre with open markets - one of a few in the region - will likely be tossed around in this environment. In fact, we may get an unfair share of volatility, for our openness means that we are a good candidate for conducting proxy hedging against adverse developments in relatively closed markets in the region. However, there are specific factors working to Hong Kong's favour. The Mainland economy remains buoyant. This will continue to benefit Hong Kong more than any other economy. Sino-US relationship, which earlier weighed on our markets, seems to be improving. We are also less exposed to the information technology sector than one or two other economies in the region. There is now more market differentiation and less contagion than before, and, with our robust markets and financial infrastructure, Hong Kong could play the role as the safe haven for international funds should there be a significant shock to the region again.
But we should never be complacent and must keep watching out for potential trouble, assess the risks involved and manage them prudently. Prevention is always better than cure. And this task is one that needs to be shared among all concerned, with the regulators working in partnership with those being regulated, and with investors and investment advisors fully alert to what is happening around us. As I have said many times before, globalisation and information technology are changing the way international finance is behaving and we all need to adapt, particularly when we aspire to continue to be an international financial centre. Readers may be aware of a book called "Who Moved My Cheese?" by Dr Spencer Johnson (The Financial Secretary gave a copy to me six weeks ago, I am sure with no special message intended!). You need to "move with the cheese". Do not get yourself into a situation in which you find yourself asking the question as to who moved your cheese. By then it is too late and in any case asking the question is itself a waste of time.
Joseph Yam
2 August 2001
Related Viewpoint Article:
Related Information:
Click here for previous articles in this column.
Document in Word format
