How Did the Financial Crisis Affect Hong Kong - Report Example

HOW DID THE FINANCIAL CRISIS AFFECT HONG KONG? OUTLINE This report has been divided into three sections including introduction, discussion and conclusion. Introduction In this part the background of the topic has been given such as the origin of financial crisis, its extension to Asian economies and nature of the crisis. Discussion In this section, the impact of global financial crisis has been evaluated on trade performance, banking system, microeconomic indicators and stock equity market. The opinions and research findings of various researchers have been used and analysed. Conclusion In this section, final conclusion has been made based on the discussion and analysis section. Bibliography In bibliography, all references have been given from which any material has been taken. Introduction Global financial crisis that emerged in industrial economies severely affected developing through foreign investment reductions, surging commodity rates, skyrocketing interest rates and lowering trade and remittances (Lin & Martin, 2010). The crisis started from the subprime mortgage crisis in the United States. The current economic crisis was emerged in 2007, in the real estate market of the United States and then it got transferred to the banking sector of European economies (Marinkovic & Radojicic, 2009). When the crisis extended to the Asia countries and other nations it affected economy most of the sectors of each economy more or less. Although the current nature of the financial crisis is different from its driving forces however, the result is the instability and uncertainty in the world economies. The extension of subprime mortgage crisis in the United States to other economies of the world has been possible through international trade and finance. The increasing globalisation and the complex and integrated financial system have increased the interdependency between the developed and developing economies. The degree of impact of the financial global crisis on different Asian economies has been different. To what extent the crisis has affected the Asia economies is based on the vulnerabilities associated with capital inflows (Akyuz, 2008). This report aims to determine the affects of global financial crisis on Hong Kong. In consideration to the point-of-view and research findings of various researchers a critical analysis will be done and finally the conclusion will be made. Discussion How the financial crisis that emerged from the U.S. has extended to Asian economies like China and Hong Kong? According to John Greenwood (2009), the recent financial crisis is different from previous recessions because they were because of increase of inflation and credit tightening, whereas, the current financial crisis is because of disproportionate amassing of debt in the financial and domestic sectors and raise in the asset prices. Greenwood argues that recent financial crisis that emerged in developed countries brought rigorous downturns for major exporters in Asian region and the nature of crisis fits with the Fisher’s analysis of 2003. Actually the increase globalised financial system is one of the major reasons which have extended this financial crisis across the national boundaries. Today, only financial services have been able to become truly global as fast-moving financial markets in parallel to advancement in technology have extended across national boundaries and government restrictions have been removed to encourage foreign investments. Therefore, globalisation has actually increased the current financial crisis (Geisst, 2009). Researchers, economists and policymakers are very interested to determine the nature and strength of the impact of global financial crisis. Hong Kong’s economy has been always remained under focus of researchers because the economy was severely hit by the Asia Financial Crisis 1997-2002. Various researchers also believe that current economic downturn of Hong Kong’s economy is the long term continuity of Asian Financial Crisis. While studying the impact of financial crisis on Hong Kong, there major opinions have come in front. One group of researchers argue that Hong Kong’s economy has been severely hit by the financial crisis based on macroeconomic indicators. Second group of researchers argue that Hong Kong economy has been hit by the crisis but various sectors of the economy has remained safe. Third group of researchers are of the view that Hong Kong has been hit by the financial crisis however; the effects are low relative to other economies. As mentioned above that major source of globalised financial system is trade and finance, therefore, first of all, the export performance of Hong Kong has been evaluated. Hong Kong is among the six top exporters of ICT goods in the world. Between 1998 and 2007, Hong Kong and Korea faced the second and third largest increase in the market shares of ICT goods export (UNCTAD, 2009). The three Asian economies which faced the largest economic growth decline during 2007-2009 include Singapore, Hong Kong and Malaysia. Moreover, if only Asian economies are considered, China, Taiwan and Hong Kong showed the most export uncertainties during the recent financial crisis. On the other hand, unlike many other Asian economies, Hong Kong’s currency did not face large declined against dollar and its reserve increased (Goldsteln & Xle, 2009). Goldsteln and Xle argued that some sectors of Hong Kong were badly hit by the financial crisis whereas some remained safe relative to other economies. Following graph of monthly exports of ICT goods accessed from UNCTAD shows that from 2007 to 2009 the export performance of Hong Kong declined significantly. In short, Hong Kong faced a huge decline in its exports (such as exports of ICT goods) between 2007 and 2009 which means that global financial crisis largely affected the export performance of the country. Graph I: ICT Goods Export during 2007-2009 Source: UNCTAD The recent crisis of 2007 to present is the result of the amassing of debt and it pushed the banking system into an ever deeper crisis through three ways. Firstly, solvency of banks was endangered by the mounting bad debt; secondly, policy of central banks of the developed economies established a fright between interbank lending markets and third, losing confidence of the investors of stock market (Kilmister, 2008). Because of the high integration of world’s banking system, the crisis extended to Asian banking system and also affected Hong Kong’s banking sector. Deutsch Research Report (2009) has investigated the impact of financial crisis on banking sector of Hong Kong. Rather than determining an overall impact of crisis on Hong Kong’s economy, the focus has been only kept towards the banking sector. The report highlights that financial services sector of Hong Kong accounts for only 5.5 percent of total employment however, it is 20 percent of Gross domestic product and total assets of the banks are 630 percent of Gross domestic product. According to findings of the report, crisis hit Hong Kong’s banking sector in 2H of 2008 when income and profitability of banks worsened, loan growth declined and asset quality deteriorated. Although report highlighted the significant affects of crisis on banking sector however, still medium-term outlook for Hong Kong’s banks was considered favourable. On the other hand Main (n.d.), in the study of impact of global financial on economies, argues that emergency bailouts of Hong Kong government were not required because the banking sector of Hong Kong was very strong to survive with the current conditions. The point-of-view of Main highlights that banking system of Hong Kong was also vulnerable to the effects of financial crisis, however, as most of the other world economies were making economic bailout strategies, Main did not recommend such strategies for Hong Kong because of strong banking system of Hong Kong. On the other hand, because of the significant contributions of Hong Kong’s banking sector in GDP, even a small impact on bank’s income and profitability could brought a huge change. Therefore, it can be argued that global financial crisis also hit the banking sector of Hong Kong. The crisis which emerged as a financial crisis soon transformed into an economic crisis therefore, examining the changes in the macroeconomic indicators of the economies became an important area of investigation for researchers. Yang and Tong (2009) highlights the impacts of financial crisis on Hong Kong. They highlight that Hong Kong’s economic growth has gone down from 6.4% in 2007 to 2.5% in 2008, inflationary pressure has increased, and exports have declined by 21.8% in 2009. Yang and Tong have conducted an exploratory study and through secondary data, they have highlighted the negative effects of financial crisis on macroeconomic sector of Hong Kong. The following graph also highlights the decline of GDP growth forecasts between 2008 and 2009 for Asian economies. Graph II: Real GDP Growth Forecast in Asia Pacific 2008-2009 Source: Euromonitor Based on real GDP forecast data for 2008 and 2009, the change in GDP has been calculated below. The change in GDP shows that as compared to other economies, the decline in GDP growth of Hong Kong is on second number. Table I: Change in GDP from 2008-2009   2008 2009 Change in GDP South Korea 4.1 2 2.1 Hong Kong 3.7 2 1.7 India 7.8 6.3 1.5 China 9.7 8.5 1.2 Vietnam 6.3 5.5 0.8 Singapore 2.7 2 0.7 Thailand 4.5 4 0.5 Japan 0.5 -0.2 -0.7 Therefore, macroeconomic indicators of Hong Kong show that global financial crisis largely affected the overall economy of Hong Kong. The researchers have also shown significant interest in studying the effects of financial crisis on the stock markets of the emerging economies. Stock markets of Emerging economies have been hit harder as compared to many developed economies and in later months of 2008, stock market valuations of China, Hong Kong and Korea have declined by 48%, 40% and 36% respectively. Moreover, foreign investors who had their holdings in Asian markets have lost their interest in this region (MrGlobalisation, 2009). On the other hand, Sun and Zhang (2009) argues that financial systems of China and Hong Kong have remained relatively resistant during the crisis because of nominal experience to securities products however, they are not complete protected and the stock markets of China and Hong Kong have declined by 71% and 56% respectively. Although both of the point of views of two sources are highlighting the significant impact of financial crisis on Hong Kong’s stock market and the impact highlighted by Sun and Zhang is even great as the data has been taken from 2009. However, Sun and Zhang still believes that Hong Kong economy coped well during the crisis because of minimal exposure to securities products whereas; report of MrGlobalisation considers relatively a harder impact on Asian economies particularly China, Hong Kong and Korea. The Graph of Percentage Decline in Equity Index Losses for Asia Countries between 2007 and 2008 shows that Hong Kong is on second number in terms of least percentage decline. Japan showed the maximum decline of 51.5 percent and South Korea showed the least decline of 31.6 percent whereas, Hong Kong showed 32.6 percent decline (Euromonitor). From the Graph of decline in equity index it is evident that Hong Kong’s stock equity market has been also affected significantly during the global financial crisis. However, the point-of-view of researchers that the relative impact of financial crisis on stock market of Hong Kong is lower as compared to other Asian economies. Table: Percentage Decline in Equity Index 2007-2008 Source: Euromonitor Most of the researchers are agreeing on the fact that Hong Kong economy has also been affected by the financial crisis, however, many of them analyses the impact based on relativism. The structural and systematic problems of Hong Kong have very little resemblance to its Asian neighbouring countries and although financial crisis has hit the economy of Hong Kong however, the situation of Hong Kong is relatively better than other Asian economies (UC Institute on Global Conflict and Cooperation). Conclusion Based on the above discussion, it can be argued that globalised financial system fuelled the vulnerabilities of economies to Global Financial Crisis. Hong Kong’s trade performance was negatively influenced by the crisis and between 2007 and 2009, exports of the country declined significantly. Banking sector of the economy was also hit by financial crisis and because of the significant contribution of Hong Kong’s banking sector to GDP, the overall economy also faced major shocks. Macroeconomic indicators such as GDP, unemployment etc have been also worsened during the period of financial crisis. Moreover, stock equity market also showed declining performance however, percentage decline is better as compared to other Asian economies. The analysis shows that in some sectors Hong Kong’s economy reported declines however; the losses are lower as compared to the other Asia economies such as the stock market and banking sector. On the other hand, in some areas Hong Kong faced significant losses as compared to other Asian economies such as GDP growth rate. BIBLIOGRAPHY Akyuz, Y., 2008. The Current Global Financial Turmoil and Asian Developing Countries. [Online] Available at: http://webcache.googleusercontent.com/search?q=cache:2laRfh-HBzYJ:www.twnside.org.sg/title2/par/current.global.financial.turmoil.doc+how+did+current+financial+crisis+extend+to+asian+countries%3F&cd=4&hl=en&ct=clnk&gl=pk [Accessed 2 November 2010]. Deutsch Bank Research, 2009. Hong Kong’s Banks During the Financial Crisis. [Online] Available at: http://www.dbresearch.com/PROD/DBR_INTERNET_DE-PROD/PROD0000000000242795.pdf [Accessed 31 October 2010]. Eghbal, M., 2009. The Global Financial Crisis: Asia Pacific Not Immune. [Online] Available at: http://www.euromonitor.com/The_global_financial_crisis_Asia_Pacific_not_immune [Accessed 2 November 2010]. Geisst, C., 2009. Globalisation and the U.S. Financial System. [Online] Available at: http://www.america.gov/st/business-english/2009/May/20090513102027wrybakcuh0.8140376.html [Accessed 2 November 2010]. Goldsteln, M. & Xle, D., 2009. The Impact of the Financial Crisis on Emerging Asia. [Online] Available at: http://www.iie.com/publications/wp/wp09-11.pdf [Accessed 31 October 2010]. Greenwood, J., 2009. Global Economic Insight. [Online] Available at: http://www.institutional.invesco.com/portal/file/invescoinst/pdf/Global%20Financial%20Crisis%20and%20its%20impact%20on%20Asia.pdf [Accessed 31 October 2010]. Kilmister, A., 2008. 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