Thursday, March 3, 2011

US v HK


The US House passed emergency short-term legislation which cuts spending by US$4 billion (HK$31.2 billion), which will be followed with another bill to set spending levels through end of the current budget year. Meantime, the Hong Kong Government, on the recent HK$6000 return to perm residents 18+ exceeds the initial HK$24 billion cost projection, and now amounts to HK$40 billion (US5.1 billion).

Hong Kong, no doubt, is in an enviable position. In 2008, Hong Kong's fiscal savings to GDP was over 50 percent, and this year, it's over 70%. Normally, the suggested level is 30 - 50 % GDP, but we're going for teacher's pet. Let's break down all the billions.

Capital Investment Fund  - HK$516.7 billion
Exchange Fund - HK$592.2 billion,
Statutory Bodies - HK$76.6 billion
Loan Fund  - HK$18.5 billion
SFC - HK$6.7 billion
More to be added later - yes - there's still more.

But for all of that, the city still inherits the Fed's fiscal policy, inappropriate for local conditions. The Hong Kong dollar is pegged to the USD which continues to hold less of a likeness to the Hong Kong economy. The weak USD and QE fuels Hong Kong's inflaton and property prices, as does investments coming in from China.

Tsang warned of the tightening of both these leaky faucets when he was defending his previous budget (not the new budget a la populistemode). Although Tsang alluded to protecting residents from inflation by not releasing cash, he made an about turn one week later. Let's see what the fallout will be (not speaking of  the Government's opinion ratings and the changes in society to Government's already weak stance).

Whatever it is, it should not amount to much. The most expansionary budget in years, these handouts will hardly affect Hong Kong's inflation, which as mentioned above, is not based on internal factors. Food prices will continue to go up, other jurisdictions CPIs will continue to trend that way, and a strong yuan and weak USD are the main causes of Hong Kong's inflationary pressure. Estimates are that at least half of the handout will be saved anyway.

Even though economists are saying its nothing more than a drop in the bucket, these handouts are like little drops of poison in the way they are changing residents expectations. More on this later...

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