Ian K Perkin: does not foresee recovery of the market in the short term

What a first half of the year it was on world equity markets – a real dose of reality courtesy of the credit crisis after the excesses of the loose money period of the past seven years or so since the last big global downturn, the dot.com bust. Hong Kong and some other Asian markets were hit, in between, by the SARS and Bird Flu setbacks.

Hong Kong’s market as measured by the Hang Seng Index did relatively well in global terms in the six months to the end of June. But it was still down 20.5 percent for the period (see accompanying table), helped along by the increased number of Mainland stocks in the Hang Seng Index after the huge number of Chinese IPOs in recent years.

Even so, compare Hong Kong’s performance with the 48 percent drop in the Mainland’s Shanghai Composite Index and the Hang Seng’s downward trajectory does not look at all bad. Nor was it anything like as bad as India’s Sensex, which was down 33.6 percent for the half year.

On the other hand, Taiwan, Korea and Japan were down only 11.6, 11.7 and 11.9 percent respectively. Singapore was off 14 percent, Australia 17.7 percent and New Zealand 21 percent. In the opening days of July, the Hong Kong market saw a modest recovery, as did other markets worldwide. But it seemed doubtful this would continue given the wider economic uncertainties.

Europe also had a weak first half of the year, with the big markets down relatively heavily. France was off almost 22 percent, Germany down just over 20 percent and Britain’s FTSE off almost 13 percent. Resource (and oil and gas) rich Russia, on the other hand, saw its market up a modest 0.6 percent for the half year.

In this context, the American markets got off relatively unscathed, despite the credit market problems in the US and beyond, with the Dow Jones down 14 percent, Canada – again with a dominance of resources – actually up 3.9 percent and Mexico pretty steady with a 0.3 percent fall. Brazil was up almost two percent and Argentina down by the same amount.

Overall, the MSCI world index was down about 12 percent in the opening six months of the year, with the East Asia and Pacific indices down slightly more than that. The question now is whether the worst is over? The increasingly evident slowdown in the global economy coupled with rising inflation suggests that it is not.

In its annual report issued at the end of June, the Swiss-based Bank for International Settlements – the so-called Central Bankers’ bank – warned that global inflation is a “clear and present threat” to the world economy. It suggested global interest rates would need to be raised and a new framework set in place to cope with future credit and asset bubbles. These are hardly positive messages for the global economic outlook and world equity markets.

The bank, which 12 months ago warned that world financial markets might soon face challenges last seen during the onset of the Great Depression, warned again in 2008 that years of loose monetary policy had created a credit bubble that might bring "much higher costs than is commonly supposed".

"The current market turmoil is without precedent in the postwar period," it said in the annual report. "With a significant risk of recession in the US, compounded by sharply rising inflation in many countries, fears are building that the global economy might be at some kind of tipping point.

"These fears are not groundless. The magnitude of the problems yet to be faced could be much greater than many now perceive. It is not impossible that the unwinding of the credit bubble could, after a temporary period of higher inflation, culminate in a deflation that might be hard to manage, all the more so given the high debt levels."

Will the competition law make any difference? Hong Kong’s Competition law has been a long time coming. The Government’s last consultation paper on the proposed law was issued on May 8 this year. The three-month consultation period for that paper ended this month, on August 5. The submissions will now be assessed, the law drawn up and considered by Legco. But will it make any difference?

Arguably a small and open economy like Hong Kong should not need a competition policy. Being small suggests it should be vulnerable to big global and national players in all sorts of industries (which, in a way, it is). Being open suggests there is nothing to stop anyone from entering the market. Hong Kong also tops plenty of global competitiveness lists. While these measure different aspects of competition, they do not suggest uncompetitive behaviour.

In reality, of course, things are different. Hong Kong is a high cost centre in global terms and has its own unique culture and history, all of which means that barriers to entry in some industries can be high and may take both government and market action (and even technological advance) to break down. This may be especially the case where an industry is based on sort of government involvement either through direct ownership, licensing or some other sanction or regulation.

A combination of history (British colony) and international practice in most parts (national monopolies) meant that for a long time Hong Kong had a telecoms monopoly. That is now gone, but still lingers on in some ways (fixed line). It also took changes in technology, market or private sector action, and government decisions to make it happen. There remain other industries with similar pedigrees.

Introducing a competition policy into Hong Kong now seems a bit like shutting the stable door after the horse has bolted. Many key industries in the SAR are already dominated by a few players. Where there is competition in the Hong Kong economy it tends to be overwhelming; where there is not there is usually a monopoly, duopoly or oligopoly. Some are government sanctioned, owned or regulated.

As things stand, the competition law proposed by Hong Kong offers the prospect of many exemptions, including government. When the legislation is finalized, it will be worth taking another look to see just what sort of teeth the new regulations will have and just how the Hong Kong approach fits with the overall national approach by the Mainland. The competition issue is still a live one.