Former Hong Kong Monetary Authority chief executive Joseph Yam Chi-kwong said he is worried that another global financial tsunami “may be on the horizon”, as the crisis from the coronavirus pandemic is proving difficult to handle.
Yam said he believes that no two crises are the same, as the Asian financial crisis in 1997 was a crisis of financial globalization, while the 2008 financial tsunami was a crisis of financial culture.
There’s still a lot of money sloshing around in the world. International capital is still quite volatile, vicious and voluminous. The problematic culture is still there
Joseph Yam Chi-kwong
former Hong Kong Monetary Authority chief executive
Unlike those two incidents, “COVID-19 triggered a sudden stop in the economy,” Yam said in an interview with the Hong Kong Academy of Finance, released on Monday. “It was very different as it’s not because of bankruptcy or drying up of money. It’s because a virus occurred, and then everything had to stop.”
Yam said the current crisis came against the backdrop of problems brought by the two previous financial crises that have not yet been resolved. “There’s still a lot of money sloshing around in the world. International capital is still quite volatile, vicious and voluminous. The problematic culture is still there.”
To address the sudden halt in the economy because of COVID-19, central banks of major economies around the world are continuing to engage in quantitative easing, pumping more money into the economies.
“It’s very problematic. I wouldn’t like to forecast what is likely to happen, but I fear that the third financial crisis may be on the horizon,” Yam said.
He said he is not in favor of quantitative easing or negative interest rates, adding, “I’m in favor of exercising a bit of fiscal discipline and saving a bit more money rather than just spending beyond your means.”
Yam said quantitative easing has side effects such as disparity of income and wealth getting worse and asset price inflation. He said that central banks and policymakers must recognize these side effects and address these issues.
As for Hong Kong, he said the city has accumulated a large amount of fiscal reserves to engage in expansionary fiscal policy, and that spending some of those fiscal reserves in support of the economy is very well justified. As it looks at additional spending to fight COVID-19, Hong Kong is looking at a budget deficit that is expected to reach an unprecedented level of HK$139.1 billion ($17.95 billion), accounting for 4.8 percent of the estimated GDP. Financial Secretary Paul Chan Mo-po has forecast a budget deficit every year from 2019-20 through 2024-25.
Yam also expressed his confidence in the city’s Linked Exchange Rate System, which pegs the Hong Kong dollar to the US dollar in a range of 7.75 to 7.85 Hong Kong dollars per US dollar. He said Hong Kong remains an externally oriented economy, and the US dollar is still the international reserve currency.
Those two factors have not changed that much in the past nearly 40 years, he said. For now, though, he is worried more about the possibility of a sharp weakening of the US dollar than he is about the Hong Kong dollar’s weakening.
