Outlook for 2008

The sub-prime mortgage crisis in the US and developments on the Mainland are the two main items to watch out for.   

Over the years I have got into the habit of sharing with readers my views on the outlook for the year ahead, focussing on the risks and opportunities on the monetary and financial fronts rather than predicting financial-market performance, which I leave to those who are more qualified. 

Quite clearly, the sub-prime crisis that originated in the US will still be on the radar screen.  I have, over the past months, shared with readers my views on this complex subject, and so I will not repeat myself.  With credit availability continuing to be a problem, despite successive cuts in interest rates, economic performance in the US generally and its housing market in particular are likely to be adversely affected in the months to come.  At a time when financial institutions are still under continuing pressure for the re-intermediation of the large stock of doubtful assets (the sub-prime-related securities) still in the market, they may face an unusually large flow of such assets.  This may put continuing pressure on their profitability and prolong the tightness in the money market. 

It would be ideal if there were a practical, once-and-for-all solution, perhaps an industry-wide one, so that financial institutions can put the problem behind them and get things back to normal quickly.  But this is easier said than done.  There seems to be considerable reluctance in the official sector (financial or otherwise) to get involved in working out such a solution, understandably given the moral-hazard concerns.  Private-sector initiatives are either institution-specific or not comprehensive enough to achieve the necessary tranquillizing effect on the money market and the availability of credit.  But a market solution is probably fairer, and possibly more in the public interest in the long run, as financial institutions shoulder the consequences of the mistakes they made, despite any risks of systemic instability.  However, as the matter drags on, the risks to the economy may persist and possibly intensify.  And as new information on how the sub-prime crisis is developing – hits on profits, capital injections and restructuring, monetary policy actions and so on – becomes available, the nervous financial markets will react to it, and volatility will continue to be a rather inevitable feature of global financial markets in 2008. 

The Mainland also bears close watching.  Again, readers are probably aware of my views on the monetary and financial conditions on the Mainland – in brief, an unusually potent scenario that may produce sharp market movements in response to policy shifts or stresses built up in the system.  While in the socialist market economy of the Mainland there could be effective administrative remedies to limit damage and maintain monetary and financial stability, how events will play out in the capitalist, free-market economy of Hong Kong will be more unpredictable and the remedies may be fewer. 

There is obviously an urgent need for the potent scenario to be harnessed for the long-term benefit of the country if the rapid economic growth and development on the Mainland is to be sustainable.  There is much to do in the areas of monetary and financial reform and liberalisation, involving hard decisions and the taking of calculated risks.  Whatever the actions may be, many of them will inevitably have implications for Hong Kong.  Those that aim at making better use of the financial system of Hong Kong to serve the important need for effective financial intermediation on the Mainland will of course benefit Hong Kong.  The ideal development model is a complementary, mutually assisting and interactive relationship between the two financial systems, something I am glad has been taken on board in the Mainland’s policy statements.  The performance of our financial markets will, to a significant extent, continue to reflect developments on the Mainland, particularly in areas such as the international mobility of capital and the reform of the capital markets.

Joseph Yam
27 December 2007

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