Economic insights: Australia, Hong Kong and the U.S.

David Chu, Head of International Business, discusses the Reserve Bank of Australia’s diagnosis of the Australian economy as well as the problems arising from the lifting of Hong Kong’s preferential tariff status by the United States.

David Chu, Head of International Business, recently joined Thomas Sung (host) on the SBS Radio Cantonese Program to discuss the Reserve Bank of Australia’s diagnosis of the Australian economy as well as the problems arising from the lifting of Hong Kong’s preferential tariff status by the United States. Listen to the podcast episode in Cantonese or read the transcript of his interview in English below.

English transcript:

Host: David, the Reserve Bank decided to keep the interest rate unchanged. Everyone knows this will happen, but what else did they say?

David: Before the meeting, economic experts had known that the RBA would keep the interest rate unchanged, because the RBA had said more than once that 0.25% was already the lowest they could afford. Unless something drastic happens, their decision will not change. So, economic experts have in turn switched their attention to what the RBA has said. When the Governor of the RBA announced his decision to keep the interest rate unchanged yesterday, he mentioned a few points. Firstly, the current Australian economy is indeed in a difficult period; secondly, the upside is that the consequences of the economic downturn may not be as bad as they initially expected; and thirdly, 600,000 people were being laid off in April, a large part of whom had their working hours reduced to zero. Household consumption is also quite weak, with many investment plans cancelled or postponed. However, they noted improvements in working hours in May, but overall the outlook remains very uncertain. They said the most important is how much confidence the general public has in the prospect at this current difficult time, which will have a direct impact on how well the Australian economy will recover in the future and how long such a recovery will take. Therefore, the RBA said they will make every effort to facilitate employment, improve personal finance and promote business finances, including maintaining low interest costs and sufficient market liquidity.

Host: In fact, the Reserve Bank has mentioned confidence more than once. There is virtually not much they can do. It is difficult to improve the economy through monetary policies.

David: They also mentioned before that by lowering the interest rate to 0.25%, they have almost exhausted their available measures. If the rate cannot be cut further, it would require quantitative easing and fiscal policies. The government may stimulate employment through tax reforms.

Host: I am aware that on Tuesday, Roy Morgan also published an Australian Consumer Confidence report. What does it say specifically?

David: Yes, Roy Morgan conducts a consumer confidence survey every week. They said last week’s consumer confidence index rose to 98.3%, an increase of about 5%, marking the 9^th straight week of increase. That means this index has rebounded and been rising for nine consecutive weeks since the sharp fall at the onset of the pandemic. Among the people they interviewed, 24% said their financial situation this year is better than last year; but 36% of the respondents said their financial situation is worse than a year ago. They also asked about the interviewees’ thoughts about the future, with 38% saying that they expect their economic conditions to be better at the same time next year; and 17% saying it will be worse than now. It seems the public’s confidence in consumption is gradually improving. It is now clear that after the government spent $200 billion, the situation seems to have improved slightly.

Host: We can see that many states in Australia are reopening. In fact, the economic atmosphere and economic activities have also increased significantly. I know you are currently in Hong Kong, so I wish to ask you some questions regarding Hong Kong now facing the lifting of its preferential tariff status by the United States. Now a week has passed, has everything been settled? What is the sentiment of the business community?

David: When Hong Kong announced the national security law at the time, a bit of shock followed in the market, and now the public is also waiting to see what the legislation will look like. Some people said that in fact, many developed countries in the world have similar national security laws. It is nothing special for Hong Kong to have one as a special administrative region of China. Of course, there are also people worrying about how this law will be implemented. Do they have confidence with this law? There is worry at this stage. The business community said that national security law will secure peace for the market so that everyone can conduct their business, which is not bad. Let us recall that it has been almost one year since last June, from social unrest to the pandemic. It has become very difficult to do business in Hong Kong. So, how much can the public can tolerate this? No one knows. To be frank, no one wants turmoil.

Host: An incidental issue is that there has been a recent rumour about Hong Kong dollars being decoupled from US dollars. The Hong Kong dollar has twice been targeted and attacked by foreign funds, but neither attack succeeded. Does this actually reflect the strong status of the Hong Kong dollar?

David: Yes, in fact the linking of the Hong Kong dollar to the US dollar does not require the approval of the US government. Everyone knows this now. Nonetheless, it remains unknown whether the US government will create a lot of trouble for Hong Kong. You see that in the current Sino-US controversies, from the trade war to the technology war, many economic experts also commented that a financial war is inevitable. As part of such a financial war, will the United States make trouble in Hong Kong, as the financial centre of China? This may have also been expected. For example, the Hong Kong Economic Journal quoted a BNP Paribas report that from 2010-2018, 73% of the overseas fund-raising of Chinese companies was done through Hong Kong, and 60% of bond issuance was done through Hong Kong. Therefore, Hong Kong holds a very important position to China. Earlier, you mentioned that foreign funds had twice failed in attempts to hit the Hong Kong dollar, and the reason lies in the mechanism of the link between the Hong Kong dollar and the US dollar. In other words, whenever someone from outside of Hong Kong exchanges US dollars for Hong Kong dollars, the Hong Kong government always meets the exchange. In turn, if you bring in Hong Kong dollars, the Hong Kong government can also exchange them for US dollars. The policy of the Hong Kong government is that every single Hong Kong dollar circulated is backed up by the corresponding US dollar. Technically, if you want to wrestle the Hong Kong dollar to the floor, you have to keep buying US dollars and selling Hong Kong dollars. The challenge will be a matter of whether Hong Kong actually has enough US dollars to cope with matching every single corresponding US dollar, unless you have other channels to secure sufficient Hong Kong dollars. Therefore, although foreign funds have twice attempted to short sell Hong Kong dollars, the Hong Kong government understands how much Hong Kong dollars are circulating in the market. The only option left for foreign funds is to borrow Hong Kong dollars for exchange settlement. Therefore, in the last two attacks, the HKMA raised the interest in borrowing Hong Kong dollars to 10-20%, resulting in the foreign funds spending a lot of money simply paying the interest. Their attacks were in vain. Therefore, the Hong Kong dollar should be relatively stable. However, if you want to start trouble, there is always a way. Since many companies do business or financing in US dollars, it will be another story as to whether there will be sufficient US dollars when repayment comes due. The Hong Kong government also signed an arrangement with the Chinese government some time ago, to ensure that if the Hong Kong government runs out of US dollars, the Chinese government will lend their US dollars to the Hong Kong government for settlement.

Host: Then we have to see if this financial war will really break out. It seems that everyone is now trying to find out about it. Okay, big thanks to Mr. David Chu, Head of International Business of ShineWing Australia, for his analysis of the RBA’s diagnosis of the Australian economy and the problems arising from the lifting of Hong Kong’s preferential tariff status by the United States. Thank you!

David: Thank you Thomas! Thanks everybody!

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