It has been five years since the onset of the Global Financial Crisis, and we are still far from the path to recovery. From Europe to the United States, central banks continue to keep interest rates at record lows to stimulate markets, but are these unconventional monetary policies working? Or are we digging ourselves into an even deeper hole?
“Put another way: can central banks save the world?” Norman Chan, Chief Executive, Hong Kong Monetary Authority, asked the full-house at the Chamber’s Annual Hong Kong Business Summit. “But before I try to address that question, I would like ask: Is the world worth saving?”
He feels that despite the very painful lessons that we have endured since 2008, we have learned nothing, and are in fact making the same mistakes that got us into our present predicament on an even larger scale.
Public debt in the U.S., for example, increased by US$6 trillion from the end of 2008, with the ratio of public debt to GDP rising from about 74% to the current 100%. In Japan, public-debt-to-GDP ratio surged from 190% to almost 240% in the same period.
There are many narratives on why this trend of rising indebtedness has occurred, but Chan said the cause of this alarming trend is not the issue. He believes that most people have become insensitive to the excessive levels of indebtedness and leveraging.
“Clearly, many people would now question the validity of this mindset. But have we learnt our lessons? Unfortunately, I’m not so sure we have,” he said.
Most of us understand what happens when we live beyond our means through borrowings at the individual, household or corporate level. However, the situation is a lot less clear when it comes to a country incurring excessive debt because the usual bankruptcy rules do not apply.
When compared to households or corporates, Chan said there are two significant problems relating to governments spending beyond their means. First, there is the temptation for governments to continue to incur deficits as the market is happy to finance such deficits. Secondly is political pressure for governments to spend and borrow now, and worry about repayment later.
“It is hard to imagine a reasonable person wanting to maintain a good lifestyle now by borrowing huge amounts of money which can only be repaid by his or her children or grandchildren. In other words, allowing or asking governments to spend beyond their means for an extended period of time is tantamount to society mortgaging the income and livelihood of our future generations,” he said.
Can Central Banks Save the World?
“We can say central banks can and do save the world during a financial crisis,” said Chan. “Nevertheless, the ability of central banks to reflate the economy or boost employment during the post crisis recovery is not as clear cut.”
Research by Bill White of the OECD and Dr Rajan, the former IMF Chief Economist and newly appointed Governor of the Reserve Bank of India, suggest these unconventional monetary policies are now in “uncharted waters” and may create unintended consequences and risks to the global financial system. Chan said these have created three key costs or risks.
First, these policies punish the savers and pensioners. Almost zero interest rates are helpful to debtors, but only those debtors who can refinance themselves at the lower rates. So, most of the U.S. home owners in negative equity or with low credit scores have not been able to benefit from the all-time-low mortgage rates. At the same time, the low interest rates cause a great deal of harm to millions of savers who have remained prudent and have avoided falling into the excessive leverage trap.
Secondly, these policies create moral hazard. “The suppression of interest rates and the injection of huge amounts of liquidity through QEs create considerable moral hazard in several ways. It delays the necessary adjustments in the debt overhang through deleveraging by households, corporates and governments. As QEs can reduce the short term pain and pressure brought by adjustments, there is a real risk the implementation of the much needed reforms in the private sector and the fiscal reform in the public sector could be delayed, or dropped altogether.
“This means the fundamental cause of the imbalances in the global financial system is not being addressed at all,” he said.
The third important cost or risk factor is the misallocation of resources and investments. With the near zero interest rates and abundant liquidity in the financial system, it is to be expected that the asset markets, especially the stock and housing markets, will benefit. But how long will it last?
“Excessive leverage is the root cause of the global financial crisis, but surprisingly, not much has changed. Many have still not learnt the lesson, and think the problems can be solved by further leveraging. And policymakers advocating extremely accommodative monetary easing still believe liquidity-driven growth is the answer. Indeed, it’s ironic that low interest rates, mispricing of risk and excessive debt levels, which contributed to the crisis in the first place, are now considered the ‘solution.’
Innovation & Talent Driving Businesses
Speakers at the Chamber's 19th Annual Hong Kong Business Summit say data and innovative services are crucial for business success
Innovation and personalization of services are becoming increasingly important for businesses, but are crucial for an advanced service economy like Hong Kong, said speakers at HKGCC's 19th Annual Hong Kong Business Summit, held on November 25.
Those services are going to become as valuable as new products, so it is vital that businesses find ways to anticipate customers' needs and serve them. "For us, the key driver of business is innovation more than products or technologies," John Rice, Vice Chairman, General Electric, said at the summit.
Jay Walder, CEO, MTRC, echoed his comments: "It is completely redefining how we serve our customers."
Tailoring products and services to local markets is essential for international companies' success, and businesses must get out of the mindset of: 'what works at home must be successful elsewhere.'
While traditionally an equipment manufacturer, GE in the last 20 years has built a service business that now represents almost half of the company's revenue. Rice attributes part of that success to the speed at which the company responded to customers' needs, but he said it is becoming increasingly difficult to maintain that momentum.
Walder said he believes urbanization is a key driver in the speed that new services are being delivered, as around 70% of the world's population will live in cities by 2050.
“This urbanization is creating new opportunities that we would not have thought of before,” he said. “As a result, Hong Kong now takes its home-grown expertise of the world’s best metro and brings it to other environments.”
Peter Wong, Deputy Chairman and Chief Executive, HSBC, said technology is playing an important role in ensuring compliance rules are adhered to and also in reducing costs.
"For the financial industry, one of the biggest changes taking place is increasing regulations as a result of the financial crisis. Unfortunately, regulations have become mixed up in politics, and countries have used the banking industry as a punching bag," he said.
He estimates that increasing regulation has doubled the bank's compliance costs, and with staff turnover of around 20%, training all staff sufficiently to be educated about procedures and compliance requirements is both time consuming and expensive. To educate a new recruit on compliance takes about 10 days to teach them just the basics, so the bank relies on systems which prompt questions on screen.
"If the regulators come looking for you, it is important to show them that you have the processes in place. But increasing compliance rules are going to make the industry dependent on systems," Wong said.
Big data crunchers and engineers
Growing dependence on systems means companies will need to find the right skills to deliver their plans. Even for companies like GE, just five years ago the company did not know how many system engineers it employed.
"We counted them and realized we had around 5,000. Now we have more than 10,000," said Rice. "But more than that, we have come to realize that the knowledge of how products work, and the information that our staff can accumulate is very valuable for innovation and new services."
This 'big data' is being put to use more and more, but also more on an individual scale. Walder said he used to believe that 'mass transportation' involved moving one single mass "blob" of commuters, but increasingly the swarms of people who travel on the MTR are broken down into individuals by analyzing their data.
"The power that big data is unleashing is phenomenal. What I really would like people to believe is that we are providing a custom service for them based on their individual needs," he said.
However, data can sometimes be misleading, so good old-fashioned legwork can sometimes be needed to confirm what information sources are telling you.
"In all my time with GE, lesson number one for me and our teams is to know what the real story is, and not just rely on the headlines," he said. "Free markets do not exist anymore, where the law of supply and demand takes over. Instead, we see everywhere government regulation and protectionism, so if you are not on the ground aligning what locals are doing, you are always going to be on the outside looking in."
People challenge
While innovation is one of Hong Kong's key competitive advantages, speakers warned that it is essential that companies do not allow their standards and level of service to slip – either due to lower standards in markets other than Hong Kong, or manpower shortages.
Hong Kong needs to urgently address the manpower shortage or risk losing its competitiveness, speakers warned. The labour shortage is hurting businesses and sooner or later companies will start outsourcing more of their operations if they are unable to find staff in Hong Kong.
"People is the biggest constraint that we have, so we need to realize that talent may come from other parts of the world," said Walder.
Wong said we also need to acknowledge that Hong Kong is losing its competitiveness; otherwise there will be no sense of urgency to address problems. It is also essential that policies are enacted to move the economy forward, and that the Government acts decisively for the overall good of Hong Kong.
Time for Action
Once famed for its can-do spirit and ability to get things done quickly, Hong Kong appears to have become bogged down in endless arguments and red tape
Business leaders speaking at the summit were unanimous that innovation is one of Hong Kong’s key competitive advantages, but warned it is essential that we do not allow standards and level of service to slip, due to insufficient manpower and mounting regulations.
Hong Kong needs to urgently address the manpower shortage or risk losing its competitiveness, speakers warned. The labour shortage is hurting businesses and sooner or later companies will start outsourcing more of their operations if they are unable to find staff in Hong Kong, or move elsewhere altogether.
Hong Kong is not alone in the race for talent, as Singapore, Macao, and even South Korea all face manpower shortages, but they are addressing the problem by importing skills that their domestic markets are lacking.
“We are already behind our neighbours in this race for manpower and talent, so if we do not urgently address this problem, there is a very real danger that companies will choose to move to where they can find the talent they need,” Jeffrey Lam, the Chamber’s Legco Representative, said at the summit.
It is a problem that needs to be fixed quickly, because it affects not just companies, but also hinders government policy. Lam cited the plan by Chief Executive C Y Leung to build more public housing for people.
“We cannot find people for the construction industry to build those apartments, so how are they going to get built?” asked Lam. “Singapore has to import labour to build apartments or for nurses to work in elderly care homes, and Macao too, so we are really being left behind.”
Stephen Ng, Vice Chairman of the Chamber, and Deputy Chairman & Managing Director, The Wharf (Holdings) Ltd, said in theory the release of more land should increase the supply of housing, which in turn will reduce the cost.
“No one is considering construction costs, which have basically doubled in the past five to ten years due to the shortage of labour, and labour costs will continue to go higher and higher unless the issue is addressed,” he said.
Dr Aron Harilela, Chairman & CEO, Hari Harilela Ltd, echoed his concerns, and added that the need to build more international schools and retirement homes to meet existing demand cannot be met under current practices.
Hong Kong is like a mini-United Nations, and many nationalities from around the world work here. However, he said we should not block out talent from overseas, whether thorough immigration policies or insufficient support services such as the lack of international school places for their children.
“The government in Singapore is encouraging overseas talent to work there and contribute to economic growth, which is why we have seen strong GDP growth there,” Harilela said. In Hong Kong, we have not pushed any plans forward. We have basically stagnated and that is why we are not seeing any growth.
David Lie, CEO and Chairman, Newpower international (Holdings) Co Ltd, said there is no argument that Guangdong is growing, and as Hong Kong is part of the Pearl River Delta, we also need to ensure Hong Kong’s economy also grows or we will be left behind.
Speakers said another issue is that the antics of a few individuals to sensationalize issues to grab the media and Government’s attention is damaging Hong Kong’s competitiveness and stunting growth. As a result, the majority is suffering at the hands of the minority, so the Government needs to stop allowing its plans to get hijacked by a few individuals.
“I would like to see the Government, and that includes the Administration, ExCo and LegCo, to leave markets to run by themselves. The business community has been bogged down with new laws to cope with, such as the minimum wage, competition law, and now they are talking about standard working hours and soon class action,” said Ng. “Can we leave business to run business, rather than leave LegCo to run business.”