OPINION> Liang Hongfu
HK needs daring action plan
By Hong Liang (China Daily)
Updated: 2008-11-04 07:50

The Hong Kong government has established a blue-ribbon council, whose members include some of the best minds in business and academia, to address the economic problems created by the fallout of global credit crisis.

As an international financial center, Hong Kong is supposed to have taken a direct hit from the financial tsunami. But the damage so far has been limited to the stock market and the investment banking sector. Aside from the rumor-fed and short-lived run on a large local bank, the financial system of Hong Kong has remained unfettered.

Because of dwindling overseas orders, some Hong Kong exporters have either scaled back or closed down their manufacturing facilities in the Pearl River Delta region on the mainland. But unemployment in Hong Kong is not showing any sign of rising on a big scale.

If you think that Hong Kong can get away lightly in this financial tsunami, think again.

Government planners and economists have repeatedly sounded the warning that the worse is yet to come. They are not crying wolves.

The slowdown in the growth of Hong Kong's all-important financial services sector seems unavoidable. Investment banking in Hong Kong has largely gone into hibernation during the capital market chill when such normal fund raising activities as IPOs, rights issues and mergers and acquisitions have ceased.

The creation and sales of derivatives products, once the core business of investment banks, have grinded to a halt as these products are becoming an increasingly hard sell to shell-shocked investors, many of whom are still counting their losses from investing in sub-prime mortgage and other equally risky debt instruments that have gone off the cliff.

If there is to be a significant flight to quality, which, in Hong Kong's case, means bank deposits, it is not going to bring too much cheers to the commercial banks at a time when lending, even in the inter-bank market, is not seen to be as assured as before.

Losses directly associated with the US credit crisis may be too small to make any significant dent in the balance sheets of Hong Kong commercial banks. What bankers worry about most could be the specter of a property market crash, leading to a massive wave a defaults on mortgage loans.

Property project financing and mortgage lending have been the bread-and-butter business of many Hong Kong banks. What's more, the property market is a source of wealth, either directly or indirectly, of many Hong Kong corporations that engage in a variety of businesses.

There is very little Hong Kong can do to stimulate overseas demand for its re-exports. Neither can it do much in reviving the ravaged capital market and the moribund investment banking industry, which are subject to external influence.

Defenders of Hong Kong's traditional economic policy of positive non-interventionism have always considered government intervention to be not only futile but counter-productive as it would create even graver problems by distorting and prolonging the automatic adjustment process.

To be sure, the economy, if allowed to run its course, will eventually regain equilibrium. But doing nothing to lessen the pain of the adjustment process is politically unacceptable in this time and age when people's expectations have risen to a much higher plane than a couple of decades ago before Hong Kong made the jump from a labor-intensive manufacturing base to a high-value-added service center.

Of course, this is not the first time Hong Kong must face up to externally-induced economic problems of varying levels of severity. Staring down the abyss of recession in the early 1990s, the then Hong Kong government embarked on the so-called "Rose Garden Project" centering on the building of the new international airport.

To save Hong Kong from certain recession now, the government and its advisors may have to come up with an even more daring plan, knowing that no action isn't an option.

E-mail: jamesleung@chinadaily.com.cn

(China Daily 11/04/2008 page8)