Chinese Online Class - Time to kick-start internal consumption

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BIZCHINA / Review & Analysis

Time to kick-start internal consumption

By Lau Nai-keung (China Daily)
Updated: 2007-09-17 10:51

Our government can learn a few things watching the financial meltdown in
the United States. They have a lot more experience in handling economic
cycles and bursting bubbles which are part and parcel of a market economy.

The central government has taken measures to cool down the property
market, and the economy as early as last year. But unfortunately, our
macro-economic management tools have not been sophisticated enough, and
the results have not been too successful.

Although our property boom has to a certain extent been arrested, the
stock market is still crazy, and the economy is growing even faster with
signs of inflationary pressure setting in. In case the stock market
crashes, we will have to face a similar situation as the US is
confronting now.

It all boils down to one and only one question: Do we want to bail out
the investors? Most economists will advise against it, as this will
entail moral hazard. Investors are thus encouraged not to be responsible
for their investment decisions and take a "head I win, tail government
loses" attitude. Taxpayers are innocent losers.

However, since the stock market is so important to the economy, and a big
crash will inevitably have serious repercussions throughout the world,
more than US$1 trillion has been pumped into the US and European
financial markets to salvage the situation, and it has been openly
rumored that the secretive Plunger Protection Team has been out to push
up the US stock market.

Early this month, US President George W. Bush made it plain that he
wanted to do something about the situation. This is understandable as a
general election is just around the corner, and the Iraq War is going
neither here nor there.

We had similar situation in Hong Kong around 2000 when the property
bubble burst after the Asian financial crisis. Initially the government
of the Hong Kong Special Administrative Region let the property market
take a free fall, at its height, more than 200,000 families were carrying
negative assets. This means that the market value of the property was
below the mortgage price, and even after selling the property, the
mortgagee still owed the bank money.

Many of them were out of jobs, or had taken a deep salary cut. They were
stuck - either unable to pay their monthly mortgage payments, or unable
to repay the bank after liquidating the mortgage. The government was
finally forced to step in. Subsequently, Hong Kong suffered 68
consecutive months of deflation, one of the longest in modern history,
and many of the flats are still 60 percent of their value 10 years ago.

(For more biz stories, please visit Industry Updates)

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