The present financial and economic crisis has not ignored Hong Kong, but it has not had the impact of the '97-'98 Asian Financial Crisis. The main reason may be that the world's loose money policies, especially in China and the US, have funds flowing steadily into Hong Kong and supporting the stock and real estate markets, and the whole economy.
Signs of a rebound have lately surfaced in Hong Kong. The retail decline in the second quarter slowed, and the rise in unemployment has also abated. Year-on-year GDP decline may well come in below the -7.8% of the first quarter. Month-on-month GDP growth may even show growth, a relief from the -4.3% in the first quarter.
If there is relief, it stems from the loose monetary policies in Mainland China and the US, rather than the HK economy itself. Fund inflow has restrained the increase of HKD interest rates. This provides the easier monetary environment that oils the real economy, helping to offset the large export decline by stimulating the stock and real estate markets. With expectations of continuing loose money in the US and the mainland, the fall in Hong Kong's GDP will certainly come in under the 6% drop in 1998.
So, to no small extent, Hong Kong's rebound depends on the money flow, which depends on the mainland and the US carrying on their present loose monetary policies.Â
China began loosening monetary policy in September 2008. Extra money in the Chinese mainland often finds its way into Hong Kong stock and real estate markets.
Asset markets in Hong Kong have become more and more sensitive to mainland policies. Since many mainland companies list on the H share market, a great deal of mainland capital is invested in them. If Beijing were to cut back on the present vast lending and raise the deposit reserve ratio and benchmark interest rate, funds flowing to Hong Kong would rapidly diminish. But the liquidity of Hong Kong's stock and real estate market is good, and it would be very easy to convert investment in these markets into cash. The withdrawal of these funds would cut the trade volume in Hong Kong's asset markets, dimming investor faith and cooling down the white hot market.
US Federal Reserve Chairman Ben Bernanke recently discussed the withdrawal strategy. He said America's loose monetary policy will continue this year. Policy might begin to tighten in the second half of 2010.
That will likely be later than monetary policy change in China. But because the HKD is pegged to the USD, its influence in Hong Kong may be unsettling. Bernanke said the change may be mainly cutting the scale of the Fed's asset liability sheet and excessive reserves of financial firms. And it may also make use of interest rates.
Cutting excessive financial firm reserves is a preventive measure, and will not directly influence Hong Kong. But cutting the scale of the Fed's asset liability sheet means taking back money from the market, which will affect funds flowing into Hong Kong. After the supply/demand relation of funds has changed, USD's interest rates will rise, therefore affecting the HKD interest rate.
If the US does increase interest rates, Hong Kong's benchmark loan interest rate will also have to increase, and Hong Kong will be forced to follow the tighter US monetary policy. Stock and real estate markets are sensitive to interest rates, and will be greatly affected. Hong Kong's economy will then have to seek new growth engines.