August has not been a very good month, but it is not the worst in recent memory. And we can hope for improvements in the months ahead.
Thank heavens August is almost over. I hope things will get better from now on. They certainly did three years ago in 1998, when we said goodbye to the worst August in Hong Kong's recent history, having involuntarily "invested" HK$118 billion of Hong Kong's reserves in Hong Kong stocks. Indeed, the market went up sharply after August 1998, as Asia recovered from the financial turmoil. Three years on, the money invested has more or less been doubled: we have recouped more than HK$138 billion and we are still holding on to about HK$85 billion of Hong Kong stocks (including about HK$9 billion of Hong Kong stocks transferred from the Land Fund).
So, although August this year has been a rather bad month for the stock market, I hope that there will be improvements seen in the months to come. I hasten to add that I am not predicting a rebound in the market. In the many years of my involvement in monetary affairs in Hong Kong, I have developed a habit of refraining from making market predictions, other than the continued stability of the exchange value of our currency under our linked exchange rate system. On occasions, I may have extended this to include comments to the effect that Hong Kong dollar interest rates would follow closely those of the US dollar and offered a guarded view on the trend of US interest rates, as I see them. But I have not made any other significant predictions on market performance. So, here I am merely expressing the hope, very much as a member of the community, for things to get better. And it is about time. Many members of our community, particularly those who have been rendered jobless by the structural change in our economy and those carrying negative equity, have had a rough time. Although it is unlikely that they will have any significant savings to invest in financial assets and benefit from an improvement in financial market performance, such an improvement should hopefully bring a better mood to Hong Kong and better opportunities for them.
The performance of the Hong Kong economy is very much dependent upon the performance of the world economy. It is true that there is a thick cloud over the world economy, stemming from the adjustment still taking place in the United States and elsewhere, necessitated by the deflation of the technology bubble. But I am hopeful that technology itself has shortened significantly the response time of many sectors of the economy to economic shocks so that the adjustment process will not be a protracted one. In any case, there is still considerable room for the Federal Reserve to cut interest rates further, should conditions warrant. Inflation is not a threat in the US. Comparing the Fed Funds Target Rate with the core inflation rate in the US, the real interest rate is still positive at around 1%, and the Federal Reserve has in the past allowed real interest rates to dip into negative territory and will not hesitate to do so if there is a need.
In any case, the Hong Kong economy is less dependent on the technology industry than one or two of our neighbouring economies or competitors. Furthermore, we should not forget that the Mainland is in the middle of the most extraordinary economic transformation ever to occur since the industrial revolution in Europe and, outside of the Mainland, we are best positioned to take the most advantage of it. The financial markets should be able to appreciate our strengths in this. Indeed, the behaviour of our currency, notwithstanding the background of the global economic slowdown, bears this out. The one-year forward exchange rate of the Hong Kong dollar against the US dollar is now at a discount of about 40 points. This means that one could buy US dollar one-year forward at an exchange rate of below (or stronger than) 7.80, and that interest rates for the Hong Kong dollar for up to one year are lower than those for the US dollar.
But the possibility that Hong Kong, in this round of global economic adjustment, will probably do better than others is no relief for those members of our community who have been suffering badly. Regrettably there is nothing on the monetary side that we can do, in terms of offering them any significant relief, without undermining the credibility of the sound policies that we have been pursuing, which are in the long-term interest of Hong Kong. Such relief, if it is justified, may have to come from other policy measures.
Joseph Yam
30 August 2001
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