Don't sweat it
Few would disagree that a low, steady pace of inflation may, other things being equal, be preferable to general price deflation. But, when Financial Secretary Henry Tang Ying-yen says that he regards deflation as Hong Kong's biggest challenge, he seems to be suggesting that it may be amenable to correction by official action.
To a considerable extent, however, deflation is merely a symptom of other vicissitudes enveloping Hong Kong, which we either cannot, or should not necessarily, seek to combat.
For instance, it is a symptom of the extended blow-out in the Hong Kong property market. This may have accounted, directly or indirectly, for as much as half of the 16 per cent fall in the consumer price index since its peak in May 1998.
One way or another, through its land, development and housing policies, government can have a significant influence on the property market. We keep hearing rumours of measures to stimulate it. But the last thing we need is an officially inspired boom that would lead to a further slump later.
The government should content itself with setting a stable long-term framework while ensuring that its actions tend towards smoothing, rather than exacerbating, the cycle. Any steps taken to redress the current deflation should be assessed accordingly.
Deflation is also a symptom of competitive pressures from the mainland (perhaps responsible for about 3 per cent of the 16 per cent). Yet, through initiatives such as the Closer Economic Partnership Arrangement, Hong Kong is seeking to integrate further with the mainland. Thus we cannot, for as long as significant price disparities exist, hope to curb this potential source of downward pressure on our prices.
Deflation is a symptom of the weak global economy and the success that other countries have had in bringing inflation down to low levels. There is not much we can do about that.
Finally, it is a symptom of our pegged exchange rate under the currency board, which rules out our using monetary policy actively to influence price levels. But there are good reasons for sticking with the peg, as the financial secretary has pledged to do.
So, there is very little scope for deliberate intervention to arrest deflation. Does that matter? Apart from being a symptom of our particular circumstances, how far does deflation itself feed back into the economy as a specific cause of weakened activity?
This is open to debate. Generally, there is little convincing evidence that credit conditions are unduly tight or of debtors being driven to the wall simply because of the increasing real burden of their indebtedness.
Most obviously, however, lower property prices have reduced activity in that sector. On the other hand, deflation has substantially restored Hong Kong's competitiveness in its entrepot trading role, as a business location and as a tourist destination. Thus, there are winners and losers; the winners may not have received their due share of attention.
So, perhaps we should not get too hung up about deflation. It may not, of itself, be guilty of all for which it is charged. As economic activity picks up, deflation will tend to ease off - or people will have less cause to worry about it. On this particular topic we should all perhaps chill out for a while.
