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Following is the speech by the Financial Secretary, Mr John C Tsang, delivered at the Hong Kong Polytechnic University (PolyU) 75th Anniversary Conference: Stabilizing the World Economy this morning (November 14):
Marjorie (Yang), Professor (Timothy) Tong, Professor (Judy) Tsui, Professor (Robert) Mundell, distinguished guests, ladies and gentlemen,
Good morning.
I am delighted to join you all here today.
First of all, I would like to congratulate Polytechnic University on your 75th anniversary. Also, a heartfelt thank you for inviting me to speak with you this morning.
Frankly, I am really overwhelmed by the topic for this conference. "Stabilizing the World Economy" is a rather weighty subject to tackle. I am worried that I will not be able to do this topic justice in a 10-minute speech. So allow me to dive right in.
The global financial crisis has lingered longer and struck deeper than many of us could have imagined it would do back in 2008.
Fortunately for Hong Kong, and for our region, we have escaped the worst of the turmoil. Nevertheless, the sovereign debt crisis in the Euro zone and economic difficulties in the US have inevitably had an impact on our economy as well.
I shall first review the imminent challenges facing the global economy, and then discuss ways that we can possibly help restore a more stable economic environment.
Some four years after the onset of the financial tsunami, the global economy continues to face downside risks. Even here in Hong Kong, we are not yet fully out of the woods.
Negative spillover from the US and Europe is evident here in Hong Kong on a daily basis - in our rising asset prices, in the rollercoaster ride of our stock exchange, in slowing exports and more.
Global economic growth has declined significantly in the past 12 months. Just last month, the International Monetary Fund (IMF) revised downwards its projections for global economic growth next year to 3.3 per cent, from its original forecast of 3.6 per cent some four months ago.
Christine Lagarde, IMF Managing Director, said the Euro zone has led the world towards what she described as, and I quote, the "dangerous phase".
Austerity measures undertaken by indebted Euro zone members, while necessary, have also given rise to greater economic pain in the short run. In fact, the Euro zone is already in recession. One in four workers in Greece and Spain are unemployed. In this globalised world, the fallout from this crisis has already hit Asian exports and productivity.
Equally challenging for the rest of the world is whether the Euro zone members are able to carry through the required structural reforms to deepen Euro zone integration. Undoubtedly, a stronger monetary union will be required for the Euro zone to restore confidence for the rest of us.
On the other side of the Atlantic, the situation is only slightly more encouraging. That said, the latest economic indicators out of the US are better than expected. However, economic growth in the US is still weighed down by the ongoing deleveraging process in the household sector as well as in the public sector. The high public debt-to-GDP ratio also limits scope for countercyclical fiscal policy. The US economic outlook is further clouded by the looming "fiscal cliff" at year-end, and that will be a major political challenge for the US government. And I would like to emphasise there is not an economic solution to the "fiscal cliff". They need to find a political solution to deal with that.
So what are the options for us to achieve a more stable world economy?
Steps taken by political leaders in Europe are, in my opinion, steps in the right direction. They recognise the need to tackle the root problems first - in other words, to pursue a banking and financial union first, and then eventually achieve greater integration on the fiscal, economic and political fronts.
In this regard, we are happy to see the recent launch of the European Stability Mechanism, complemented by the bond-buying plan of the European Central Bank, and their commitment to set up a single Euro zone bank supervisor.
However, there are still plenty of things that need to be done collectively by the European economies. Also, the peripheral Euro zone economies individually need to show strong, perhaps more accurately, even stronger, commitment to complete the various fiscal and economic structural reforms.
Time is of the essence for the Euro zone. Their immediate challenge is to balance the divided interests among the Euro zone members, while avoiding political brinkmanship. The markets may lose their patience completely, and that would be unfortunate, if European leaders fail to take timely policy actions to deliver on their promises.
In the US, the critical issue of the "fiscal cliff" is fundamentally an artificial problem created by politicians. The drastic automatic tax increases and spending cutbacks under its existing budget law can be averted. That's if American politicians commit to solving the problem in the spirit of bipartisanship. With the re-election of President Obama, I do hope that this will generate new momentum for the two parties in the US to reach a compromise on the issue of the "fiscal cliff" to avoid derailing the ongoing US economic recovery. After all, it requires more of a quick political solution to meet this imminent challenge.
It is equally important for the US to derive a credible medium-term path to contain and eventually reduce the high public debt in the US. Removing uncertainty on the fiscal front will go a long way to restoring business confidence and economic activity.
In the meantime, we should not lose sight of the need to strengthen the international financial infrastructure. This is required to contain systemic risks in the financial markets, forestall excess leveraging in the private sector, and reduce the over-reliance on a single international reserve currency. Only by reshaping the financial architecture and removing the shortfalls of the current system can we hope to prevent a repeat of the recent financial tsunami.
The influence of emerging economies is on the rise. Mainland China is perhaps the most prolific example. Together, emerging economies account for half of world output. Major emerging economies have a bigger role to play now than ever in stabilising the world economy.
The government debt-to-GDP ratios in emerging economies currently average just 35 per cent, which is much healthier than that of over 110 per cent in the advanced economies. Emerging economies have the policy space to shift the balance of their growth towards domestic demand.
Mainland China is a case in point. Despite the challenging external environment, the Mainland economy managed to expand solidly by 7.7 per cent year-on-year in the first three quarters of 2012, far outpacing the world average. Indeed, recent data have continued to point to the resilience of the Mainland economy, with indicators for domestic demand re-accelerating again. This would bode well for many Asian economies, including Hong Kong, because China is no longer just an export processing centre, but an important market in its own right.
In the face of all the difficulties in advanced economies, central banks in the US, Europe and Japan have responded with enlarged quantitative easing. The effectiveness of these measures in shoring up economic growth remains to be seen. But the potential side effects of pumping liquidity into emerging economies can be hugely destabilising in terms of asset price gyrations, higher inflation and exchange rate volatility.
In Hong Kong, we are well aware of the knock-on effects that have accompanied quantitative easing in advanced economies. Just two weeks ago, in the wake of QE3 in the US, I announced further measures to help stabilise our property market. I am ready to take more action, if necessary, to safeguard the macroeconomic and financial stability in Hong Kong.
The Hong Kong Monetary Authority (HKMA) and other financial regulators have all stepped up their efforts to enhance risk management in the financial system. The HKMA has intervened 10 times recently to keep the Hong Kong dollar within its trading band with the US dollar, amid hot money flowing into our city.
So the effects of the global financial crisis are all around us. I would like to conclude by highlighting three main lessons that we should learn from the ongoing crisis.
The first lesson is fiscal prudence. This is of utmost importance to us here in Hong Kong, as well as to other economies. This should be a key consideration when we deliberate on the fiscal implications arising from tackling social issues, such as the ageing population and income inequality.
Second, a lack of market flexibility constitutes a major adjustment problem in the highly indebted Euro zone economies. Hong Kong has strong market institutions. The flexibility of our market economy is a valuable asset that we need to cherish and nurture. We need to be careful not to bind ourselves further.
The third and final lesson is the danger of political stalemate and brinkmanship that have become major obstacles to the recovery in the US and Europe. It has prevented political leaders from taking timely action to meet the economic challenges. The policy uncertainty has resulted in notable economic costs. I believe that we can do better in Hong Kong, and I hope that we are more sensible.
Ladies and gentlemen, it is fairly clear that the global economy is still fraught with considerable uncertainties and downside risks.
It is equally clear that resolving the financial and economic difficulties is much easier said than done. The political structure is out of kilter with the current globalised financial environment. In a world of borderless finance and economic activity, all too often the political will in different countries, and even between different political parties in the same country, has hindered recovery for all.
This is a recurrent issue at various financial meetings that I have attended recently including the APEC Finance Ministers' meetings, the APEC Leaders' Meeting and the G20 and so forth. There is also a common commitment from different countries to resolve differences and restore stability through an inclusive approach.
In the meantime, Hong Kong will continue to keep our own house in order through prudent fiscal policies, maintaining international standards and striving for closer interaction with our partners around the world.
Thank you very much.
Ends/Wednesday, November 14, 2012
Issued at HKT 17:58
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