Ian K Perkin: For Asia, the economic downturn will be worse than expected

The primary problem with the multiple US government reactions to the country’s credit market seizure and Wall Street’s heart attack are that they address the symptoms and not cause of the events undermining the country’s economy. In simple terms, the US solution to the bad debts debilitating its markets is to pile on more debt. The difference this time is that it is direct government debt, not private sector debt.

In the process, large parts – indeed, elements that go to the very core and history of the US financial system – have been allowed to fail; have been subject to forced sale or merger with others; or have been nationalised (although this word is not used) by the State. In the meantime, the consumption and investment excesses by government (wars) and private sector (real estate and everything else) that have led the US to this sorry state are not addressed.

They were not addressed in the billions of dollars splashed out in the run-up to the huge US$700 billion bail-out plan announced in September and finally passed in early October, and they were not addressed by the bail-out plan itself. Perhaps they will be addressed by the new President when he takes office in January, but they are so immense that it must be in doubt. What is required is a root and branch re-assessment of US economic objectives.

For Asia, the images arising from these events seem to be evocative of the times. On one side of the globe China celebrates the successful Beijing Olympic Games and the again successful first walk in space by a Chinese astronaut. On the other, there is a financial meltdown on Wall Street as the worst credit crunch in 80 years brings some of the world’s oldest and most admired financial houses to their knees.

There is certainly a deep temptation in Asia to regard these events as opposite ends of the scales of 21st century power – the decline of the West and the rise of the East (Asia); the decline of the old “Atlantic” powers and the rise of the “Pacific”. These are doubtless among the great questions of history – and questions only the passage of history can answer – but for Asia it is the more immediate and practical matters that are most important, at least for now.

At a macro-economic level, these vital matters include questions of whether the crisis is truly over, or whether a “second wave” will hit the US and global economies in the months ahead; whether the financial crisis will be replaced by a broader recession, not just in the US but globally; whether Asian growth has been “decoupled” from the US; or whether a new American President, elected this month and to be inaugurated in January, can restore confidence in financial markets and the broader economy?

East Asia should also be careful as to what it wishes for. Initially it was Japan, then the four tigers (Hong Kong, Singapore, Taiwan and Korea), followed by the other ASEAN states and the emerging giants of China and India, that owe a large part of their success to US excess. It has been demand from the US that has been at the core of their growth, along with US investment and technology. A restructuring of the US away from consumption to saving would radically impact Asia as well.

These are indeed big questions, but for Asian business, there is an even deeper level of practicality at the micro level. A key question facing East Asia in the aftermath of the blood bath on Wall Street and beyond is whether the region has emerged stronger – both actually and relatively -- in global financial market terms as a result. A second is whether Hong Kong alone, as the region’s leading financial centre, has also emerged stronger. A third is whether both can capitalise on their good fortune.

Again, the temptation in Hong Kong and throughout Asia is to answer a resounding “yes” to all three questions. First, the savage downturn in equity markets apart, the region has escaped – at least to date – the US or global or “Anglo” credit meltdown relatively unscathed. Second, the acquisition, failure, nationalisation and/or changed status of many of the world’s (once) greatest financial institutions has weakened US/Anglo dominance of financial markets. And third, this will open opportunities for new institutions, a number of them in the immediate region, including Hong Kong.

There seems little doubt that the credit crunch in the US and failure and rescue of so many financial institutions by the State (in the US and elsewhere) have changed both the reality and perceptions of American capitalism. This will have an impact in Asia in terms of American influence and in developing Asia’s own economic, business and financial structures. More practically, it will also offer great opportunities for the emerging financial institutions of Asia, perhaps no more so than in China and Hong Kong -- and Japan, Singapore and elsewhere for that matter.

However, whether the region and its financial institutions are able to grasp those opportunities is by no means certain. The first hurdle is whether there will be a “second wave” of the present financial crisis; that the US Government’s rescue package for financial markets in the US fails; Asia is no longer distanced from the crisis; and the world economy collapses into a serious recession or worse. All bets are off in this scenario.

Provided this (admittedly major) hurdle is overcome, however, the way does seem open for East Asia and its financial institutions – especially those in Japan, Hong Kong, China, India and Singapore – to play an even greater role in global markets. First the diminishing Wall Street ranks creates a vacuum that needs to be filled; second, US capital markets and the economy are already reliant on East Asian dollars (and petro-dollars in the Middle East); and third, Asian financial markets and their institutions are on the rise (and often already with State backing).

As for the immediate economic outlook in Asia, for five years this column has stuck with its medium term forecast that there would be an economic downturn in the region in 2009. The present extraordinary crisis in the credit markets, beginning in the US a year ago and then spreading elsewhere, especially in Western Europe, has complicated the original logic behind the forecast. But Asia could still be set for a 2009 downturn, perhaps now worse than originally expected.

The original reasoning behind the 2009 recession prediction was based mainly on three factors – first the length of the boom, second the fact that China might be more inclined to slow its economy down after the a successful Olympics in August 2008 and third, a new American president, elected in November 2008, would be more likely to attempt to clean up the fiscal mess left by the outgoing Bush administration.

More than ever now, the focus will be on the new American administration and the policies it puts in place to address the underlying problems in the US economy and financial markets. Restoring confidence will be the key to avoiding a severe downturn and much of that will revolve around the success or otherwise of the rescue package in the US and the policies of the new US President, financial, social and diplomatic!
Hong Kong on track despite crisis?

Hong Kong has survived the worst of the US credit crunch -- and the global cracks that extended from its Wall Street epicentre –relatively unscathed. At least that has been the record to date. To be sure, the share market has taken a battering, but this has been a universal response to the extraordinary events in the US. There were concerns about Lehman’s mini-bondholders in the local market and, of course, short-lived – and inaccurate – rumours about liquidity at the Bank of East Asia.

Given Hong Kong’s experience with various crises over the past decade, the various authorities responsible for financial stability appear to have responded in a timely fashion to events in the US and emerging public concerns locally. They seem to have kept legislators well briefed. From time-to-time, too, they have emerged to generally re-assure the community on the soundness of its economy and financial markets.

These aspects of the Hong Kong experience in recent weeks have all been well commented on, but one that has not received much attention is the impact of the Hong Kong budget. With hindsight, the joint strategy of the Chief Executive Donald Tsang and his Financial Secretary, John Tsang, of leaving money in the community through a series of tax and other concessions, as well as increased spending has been working.
A look at the accompanying table shows the result in the first five months of the year to August (the latest available at the time of writing). In line with the budget strategy, revenue is down on steeply on the same period last year (by 27.55 percent) and spending is up (by 11.58 percent).

As a result of all this the budget deficit for the first five months of the year has blown out considerably to $36.16 billion from a modest surplus of $1.19 billion at the same time last year.

This means the Budget is probably providing much needed stimulus at a time of difficulty in the financial markets. Indeed, given current global circumstances and immediate expectations, the question may be whether it is working too well. Will the economy perform well enough between now and March next year to ensure the budgetary targets are met?

Certainly, the financial secretary is aware of the dangers. On September 19, as the crisis on Wall Street escalated, he told Legco members and reporters:

“The slowdown will also affect directly Government revenue. This will greatly limit room for manoeuvre when drafting the next Budget. However, the fundamentals of the Hong Kong economy remain sound. While a worsening external environment and volatility in the financial markets will increase the risk of an economic downturn, Hong Kong’s longer term economic outlook remains positive.”

 HONG KONG BUDGET OUTCOMES