Turning Crisis Into Opportunities

Where do we stand?
During the second half of 2008, economic growth slowed noticeably. In Q3 2008, the GDP grew at 1.7% down from 4.2% in Q2. The GDP growth for 2008 is now estimated at 3.0 to 3.5% (officially announced on 14 November 2008) and it is unlikely that the original forecast of 2009 GDP growth of 4.5% made at the time of the Budget Speech for 2008/09 will be achievable.

No systemic damage but not immune

HK has been through many financial crises in the past. In recent times, HK survived the 1967 riots, the 1987 Black Monday, and the 1997 Asian Financial Crises. Since 1997, we have also faced down the SARS epidemic in 2005. Each crisis had its own origin but the end result is a “crisis of confidence”. After each crisis, new measures were put in place to ensure the integrity of our financial system. Thus, HK is better prepared than most to weather the current storm.

The current Financial Tsunami is both deeper and wider in its impact on the local economy. With the exception of Black Monday in 1987, the crises we faced in the past were localized in scope. Even the 1997 Asian Financial Crisis was restricted to the Asian region and the Asian economies were still able to export their way out of recession because the US and European economies continued to remain strong and their consumers provided the demand for Asian goods.

This time it is different. The most optimistic forecasts for the US and European economy for 2009 is for no more than 1.5% growth and many are forecasting negative growth. With the US and European consumers expecting to cut back on their spending due to unemployment and tighter credit, the Asian economies need to look beyond the traditional export led recovery scenario.

During the Asian Financial Crisis and the SARS Outbreak, both the stock and property markets suffered major setbacks. However, manufacturers and exporters were not affected as the orders continued flowing from the US and Europe. During the current crisis, manufacturers and exporters are as severely affected as those in financial services with their order books being down by 50% or more. It is now obvious that a purely monetarist approach of loosening credit and lowering interest rates will not have the same effect as in previous other financial crises.

What are we doing about it?

The current meltdown calls for a Keynesian (i.e. fiscal) approach to stimulate the economy.

On 15 October 2008, the Chief Executive of the HK Government, Mr. Donald Tsang, announced a number of measures in his Policy Address aimed at maintaining and expanding HK’s position as an international financial centre. The cornerstone of the measures to combat the slowdown in the economy ranges from minor tweaks which can be implemented almost immediately to major public works programs.

Longer term, the HK government will start implementing 10 major infrastructure projects which will require total investments of HK$250 billion (US$32 billion). Some of these projects are aimed at integrating Hong Kong with nearby provinces on the Chinese mainland e.g. HK/Macau/Zhuhai Bridge (HK$37 billion) and Guangzhou/Shenzhen/HK Express Rail Link (HK$40 billion). While others are aimed at further development of the transport links within HK itself e.g. Shatin/Central Rail Link (HK$38 billion), Tuen Mun Western Bypass and Tuen Mun/Chep Lap Kok Link (HK$20 billion). Urban development has not been forgotten as the West Kowloon Cultural District project (HK$22 billion) will finally be started. All of these projects are in the final planning stages and implementation works will begin in two years time.

Altogether, 180 minor capital works programs will be started within the next 2 years involving some HK$60 billion (US$7.7 billion). These interim programs are meant to help the local economy absorb the return flow of construction works from neighboring Macau where the construction boom in hotels and casinos is grinding to a halt.

The Chinese have a saying, “Water from far away cannot put out the fire next door”. Clearly, something needs to be done within the next two years. The Chief Executive will chair a Task Force to monitor and assess the impact of the financial crisis and to recommend actions which can be taken to help alleviate the effects. HK government departments have been asked to assess their needs and come up with a list of projects which may be outsourced to the private sectors in an effort to sustain employment in the non construction area.

Most important of all, these are not “make work” projects. In other words, they are projects which are economically justified and are needed to allow the economy to continue to grow and integrate with the Chinese mainland. “Make work” projects which are not economically justifiable are a waste of taxpayers’ money, and are no more than “handouts”.

Crisis? What crisis?

The Chinese word for “crisis” (危機) is made up of two characters, danger (危) and opportunity (機). Since 1967, we have seen no fewer than 4 major and countless minor financial crises. Yet, we have weathered the turbulence and came out stronger with better regulatory regime and more vibrant business environment. And the current storm will also pass.