US should lead by example during crisis
Central bankers are expected to try to calm markets and ease the anxiety of investors in times of crisis. So the warning by Hong Kong Monetary Authority chief Joseph Yam Chi-kwong of a second, even more serious, wave of financial turmoil is disconcerting. After what the credit crunch has done, it is hard to imagine an even more damaging second hit.
However, the scenario worrying Mr Yam is one generally accepted among the financial elite in Hong Kong and abroad. He no doubt considered it his responsibility to prepare us for what is likely to happen before long. Bank of China vice-president Zhu Min spoke of a second wave of financial carnage weeks ago. At the World Economic Forum in Davos, Switzerland, leading participants warned against what they called 'financial protectionism', especially that coming from the United States. Hong Kong, according to Mr Yam, will not be immune to its globally destructive impact.
The problem is that foreign banks, such as those from the United States and Britain, are under intense political pressure to expand domestic lending and withdraw overseas capital. As recipients of massive bailouts from their governments, most of these banks will find the pressure almost impossible to resist. Therefore, having caused the global credit crisis, these same western financial institutions are pulling foreign credit and capital at a time when the world economy needs them most. Furthermore, the deficit financing used by western governments, especially the US, is crowding many emerging economies and their companies out of the international capital markets. As has been pointed out, capital protectionism is even more harmful than trade protectionism because it affects entire economies and capital flows, not just select sectors or industries. The irony is that the US, the epicentre of the crisis, continues to borrow at low interest rates while even disciplined economies in the developing world cannot borrow, or can only do so at punitive rates.
In Hong Kong, syndicated corporate loans worth more than HK$100 billion will mature this year. As foreign banks account for up to 40 per cent of these loans, there is a danger that local borrowers will not be able to extend or roll over their loans. Many struggling companies may fail, despite the government's expanded loan guarantee scheme for small and medium-sized companies. The scheme, after all, only accepts companies that are considered creditworthy by commercial banks. The government is right to maintain fiscal prudence and resist calls for major stimulative spending. Even so, it should consider helping to secure loans for more companies that are viable but have trouble borrowing. Banks, as we have seen, have not been the best judges of lending standards.
The world cannot recover until its largest economy has. But the US cannot blindly pursue beggar-thy-neighbour policies to pull itself out of a hole. It is hoping to continue to exploit its position as the issuer of the world's reserve currency by selling more IOUs in the form of US Treasury bills and printing money backed by nothing but the good name of the US government.
The US should be reminded of its global responsibility to help struggling economies. It should allow its overseas creditors to lay claim to real US assets such as those it already owns in the financial and mortgage sectors from federal bailouts. This will quickly attract foreign investment and boost economic recovery. Americans have been fond of lecturing others on the evils of failing to open their economies and of pandering to nationalist sentiments. It's time for the US to practise what it preaches.