Churn­ing money does econ­omy no good

China Daily (Hong Kong) - - COMMENT - HONG LIANG The au­thor is a se­nior ed­i­tor with China Daily. jamesle­ung@chi­nadaily. com.cn

Zhou Xiaochuan, the head of China’s cen­tral bank, has on var­i­ous oc­ca­sions re­minded the fi­nan­cial sec­tor about the im­por­tance of serv­ing the real econ­omy rather than be­com­ing an iso­lated money churn­ing ma­chine pump­ing up a vir­tual econ­omy.

Zhou’s warn­ing is of par­tic­u­lar sig­nif­i­cance at a time when the gov­ern­ment is step­ping up fi­nan­cial re­form, which could fun­da­men­tally change the ways banks have been do­ing busi­ness. The move, bold in con­cept and wide in scope, has un­der­stand­ably raised some con­cerns about the pre­pared­ness of the bank­ing sec­tor and the fi­nan­cial mar­kets which have never been ex­posed to the, some­times un­for­giv­ing, free mar­ket forces.

The out­break of the fi­nan­cial cri­sis in the United States in 2008 demon­strated most force­fully the dev­as­tat­ing ef­fect of bankers’ ex­cesses, as they led to the un­rav­el­ing of the vir­tual econ­omy, or the burst­ing of the bub­ble, if you like, which, in turn, plunged the United States and Euro­pean economies into a pro­longed slump, which has come to be known as the “great re­ces­sion”.

As the US and var­i­ous Euro­pean economies are try­ing to pick up the pieces from the fi­nan­cial fall­out, politi­cians and econ­o­mists are be­gin­ning to trum­pet the need to re­build the real econ­omy in which wealth is gen­er­ated not by churn­ing out money but rather by adding value to com­modi­ties that peo­ple need or want to buy. What they have also fi­nally re­al­ized is the boom in the fi­nan­cial sec­tor that eclipsed most other eco­nomic sec­tors was a ma­jor fac­tor in con­tribut­ing to the widen­ing wealth gap. This has be­come a key po­lit­i­cal is­sue, as high­lighted in a re­cent speech on poverty by US Pres­i­dent Barack Obama.

The elo­quence of Obama has res­onated in the Hong Kong Spe­cial Ad­min­is­tra­tive Re­gion where the glar­ing in­come dis­par­ity be­tween the small mi­nor­ity at the top and the rest of the pop­u­la­tion is a key source of pub­lic dis­con­tent, man­i­fested in fre­quent street protests and deep­en­ing dis­trust of the gov­ern­ment. The root of the prob­lem is widely per­ceived to lie in the ex­tremely lop­sided econ­omy that is al­most en­tirely de­pen­dent on the fi­nan­cial and prop­erty sec­tors for growth.

Hong Kong may be the ob­ject of em­u­la­tion for many as­pir­ing in­ter­na­tional fi­nan­cial cen­ters in this re­gion, par­tic­u­larly Shang­hai, but the boom in fi­nance, fanned by the in­sa­tiable de­mand for cap­i­tal by main­land en­ter­prises, is not per­ceived to have brought pros­per­ity to the ma­jor­ity of Hong Kong peo­ple.

In­stead, the fi­nan­cial mar­ket bo­nanza, which has helped greatly push up prop­erty prices, is seen as a de­stroyer of the mid­dle-class, who are forced to spend a big­ger and big­ger por­tion of their in­come to se­cure a roof over their heads. What’s more, in­come earn­ers, other than the few in fi­nance or prop­erty, have seen their salaries and sav­ings eroded by ris­ing costs fu­elled by escalating prop­erty prices.

The gov­ern­ment is try­ing to solve the prob­lem by propos­ing to in­crease the sup­ply of af­ford­able hous­ing, rather than by any at­tempt to re­bal­ance the econ­omy. The ques­tion is af­ford­able to whom.

The vir­tual econ­omy of Hong Kong has gen­er­ated mainly un­skilled and low-pay­ing jobs with lit­tle, or no, prospects of ad­vance­ment in the ser­vice sec­tor, in­clud­ing re­tail and cater­ing. As such, it has stymied so­cial mo­bil­ity and crip­pled the trickle-down ef­fect of eco­nomic gain.

A gov­ern­ment sur­vey has shown an as­tound­ingly large num­ber of work­ing poor whose in­come falls be­low the ar­bi­trary poverty line. Most of them won’t be able to af­ford the gov­ern­ment-built “af­ford­able” hous­ing which are sell­ing for more than HK$5 mil­lion ($644,788) on av­er­age.

The Hong Kong fi­nan­cial sec­tor doesn’t have a do­mes­tic real econ­omy to ser­vice. Un­til it does, there is lit­tle the gov­ern­ment can do to ad­dress the widen­ing wealth gap is­sue other than di­rectly sub­side those at the bot­tom end of the eco­nomic and so­cial scale.

Zhou’s cau­tious words are timely. The mod­est steps in fi­nan­cial re­form taken so far have brought lit­tle relief to the cash-starved pri­vate sec­tor man­u­fac­tur­ers, the back­bone of the real econ­omy, while banks, big and small, are ex­ploit­ing the op­por­tu­nity to fran­ti­cally re­struc­ture their as­sets by is­su­ing what they called wealth man­age­ment prod­ucts, which are noth­ing more than se­cu­ri­ti­za­tion of loans, good and bad, for sale to in­di­vid­ual in­vestors.

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