Joseph Yam's New Year Wishes

inSight

30 Jan 2003

Joseph Yam's New Year Wishes

This year I am afraid I am somewhat at a loss about what to write in this Viewpoint article for the Lunar New Year. Most of my well-intended wishes of last year turned out to be no more than wishful thinking - a reminder that wishes are not predictions. In any case at Lunar New Year we are all allowed to indulge a little in wishful thinking. Even so, I was advised that in doing so as Monetary Authority I may incur some reputation risk if those wishes failed to materialise. This year, therefore, I shall just limit myself to saying "Kung Hei Fat Choy". And just in case, like me, you have the habit of spending the Lunar New Year holidays reflecting on the past and looking towards the future, let me advise you not to get too depressed doing so. There is always a brighter side to things.

If the slow economy and high unemployment are causing you concern, the brighter side is the sharp recovery in exports that Hong Kong is currently experiencing. Sooner or later, the export-led recovery will bring benefits to the wider community, in terms of growth in income and employment. The composition of our exports has changed dramatically in recent years. There is now a much greater concentration of re-exports, and - of increasing significance - transhipment trade, than domestic exports. This structural change has resulted in quite different economic dynamics, in that there has been a lowering of the sensitivity, or the readiness, with which the Hong Kong economy reacts to, and benefits from, a surge in exports. But the benefits should become more widespread, through a recovery in demand for export-related services, and as the many Hong Kong manufacturers who have established themselves in the Mainland dispose of the considerable profits they have earned, and booked in Hong Kong, from the products they have exported through Hong Kong.

For those concerned with deflation, the brighter side is obviously lower prices for almost everything and the higher purchasing power of incomes and savings. It is also a necessary evil for Hong Kong, given the very special circumstances that we are exposed to, arising, among other things, from the increasing economic integration with the Mainland of China. Deflation facilitates price convergence, which will enable Hong Kong to benefit more fully from the very rapid economic expansion in the Mainland. And it is the least risky alternative to structural adjustment. We have already gone a long way over the past four years and we should persevere, although the process has proven to be quite brutal. We must also remember that we are not going through Japanese style deflation. It is true that, notwithstanding low interest rates, deflation means high real interest rates, which discourage consumption. But it also means a lower real effective exchange rate (almost 20% lower now from the peak in 1998), which is one of the main reasons behind the surge in exports we are currently seeing. The beneficial effects of deflation on exports, and (albeit slowly) on income and unemployment, should more than compensate for the depressing effect on consumption expenditure, given the highly externally oriented nature of Hong Kong.

For those concerned with the budget deficit, the brighter side is clearly ample fiscal reserves, no government debt and determination on the part of the Government to reign it in. Lest it be forgotten, it is quite legitimate to be running counter-cyclical budget deficits, although it is true that, given the highly externally oriented nature of our economy and therefore the low expenditure multiplier, we cannot even hope to spend our way out of a recession. What should be of concern, however, is the negative impact that prolonged fiscal deficit will have on confidence in our financial system and the risks that it poses to the monetary system - a concern that has been highlighted by both the Chief Executive and the Financial Secretary. With community understanding and support, I am confident that the Financial Secretary will be able to deliver solutions. Consequently, there should be no adverse impact on the stability of the currency.

There are obviously other concerns, notably bankruptcy and negative equity mortgages. The brighter side is that we can expect to see gradual improvements in both, as the economy starts to recover and as the residential property market stabilises under the influence of the recent government measures. And despite these problems, Hong Kong's banking system has remained one of the most healthy in the world.

And so, as we step into the Year of the Ram, weary after some years of difficulty and troubled by the many challenges that lie ahead of us, let us try to look at the brighter side, and face those challenges with courage and determination. Things will get better.

 

Joseph Yam

30 January 2003

 

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