Subprime crisis will hit us all; hope for a soft landing
Americans were not the only ones who awaited anxiously the release of President George W. Bush's US$145 billion stimulus package for the US economy. The rest of the world is wondering whether it is sufficient - and whether it has come in time to prevent the world's biggest economy sliding into a full-blown recession.
There are good reasons to be concerned about a serious slow-down in the world's principal growth engine. Most people's fortunes are tied, to varying extents, to the health of the US economy. This is true of Hong Kong, but also the mainland, for which the US remains its second most important trading partner, after the European Union. Their decoupling from the US economy, thanks in part to rising trade and commercial ties with neighbours, may provide some protection, but not enough to shield either economy from the chill winds blowing from North America. Studies by the Hong Kong Monetary Authority show the city's economic health still relies very much on the US despite our growing integration with the mainland.
The White House package offers a combination of personal tax rebates and business tax breaks equivalent to 1 per cent of US gross domestic product. Mr Bush hopes it will help revive an economy where consumer spending - already eroded by the collapse of the market for subprime mortgages, issued to lenders with poor credit histories, and the ensuing credit crunch - accounts for 70 per cent of economic activity. But some critics have already blasted the stimulus plan as too little, too late. They have a point.
At the very least, we should not expect a speedy recovery in the US. This is even assuming Mr Bush's rescue package works. By definition, it is a short-term stimulus. Last time similar tax rebates were offered - in 2001 - two-thirds was spent by US consumers within six months. But experience shows that, unlike the stock market, once a property market collapses it takes many years for it to recover. Hong Kong flat owners know all too well from their painful experiences of recent years how long negative equity can last. Millions of American homeowners are about to find out.
Still, people in Asia can take some comfort this time round. Hopefully they will not be the ones to bear the full brunt of painful economic adjustment as they were in the East Asian financial crisis of 1997 and 1998.
The current crisis has its origin in the slump in the US housing market and in the value of esoteric financial instruments based on it. It has hit banks and other financial institutions not only in the US but in many parts of the world. HSBC and mainland banking giants such as ICBC and Bank of China are exposed - though thankfully not to the extent of their US counterparts. It is possible the crisis will be confined to the financial sector without spreading to the world's high streets. This is the not-so-bad scenario for the world economy.
There is a more worrying possibility, though, for Hong Kong and the mainland. A recession in the US, another one in the offing in Japan and the aggressive monetary tightening and price controls imposed on the mainland may create the perfect storm, undermining corporate earnings and unleashing a bear market on both sides of the border. The best that we can realistically hope for, then, is a soft landing on the mainland, a mild recession or slow-down in the US and a quick recovery in Japan.
Some pain is to be expected for everyone, but hopefully not too much this time.
