The world stands on the cusp of its third financial slump in a quarter of a century, as the cash unleashed by central banks is insufficient to stem the shrinking consumption caused by the coronavirus pandemic, said the former official who steered Hong Kong's capital markets through the previous crises.
Additionally, the "problematic" quantitative easing - essentially printing money - by central banks may lead people to spend beyond their means, warned Joseph Yam, who was chief executive of the Hong Kong Monetary Authority (HKMA) from 1993 to 2009, in one of a series of online interviews organised by the de facto central bank.
"I fear that the third financial crisis may be on the horizon," Yam said in a video posted on YouTube by the HKMA. "It is because a virus occurred, and then everything had to stop. Now this one is not easy to handle."
Yam, who is an executive council member of the cabinet of Chief Executive Carrie Lam Cheng Yuet-ngor, gave his bleak assessment in a video interview on Monday. It came on the same day he and other members of the cabinet hosted a special meeting to decide to ban restaurant dining from Wednesday as the Covid-19 infections in Hong Kong closed in on the 3,000 mark.
The outbreak started to emerge in January and has now infected over 16 million people globally.
The health crisis, together with US sanctions imposed on Hong Kong after Beijing introduced the controversial National Security Law, has led many to worry about the local currency's 36-year old peg to the US dollar.
Yam said he is fully confident in the resilience of the peg, which he helped establish in 1983.
"I actually worry more about the US dollar falling sharply rather than the Hong Kong dollar being put under pressure on the weak side," said Yam.
Hong Kong has attracted US$14 billion in net capital inflows since April as investors chased a series of mega IPOs. This pushed the Hong Kong dollar to the strong end of its permitted trading band, forcing the HKMA to intervene 29 times to sell HK$109.3 billion of the currency to prevent it from breaching the limit.
"What has been affecting Hong Kong as an international financial centre was the social unrest that we have experiences in the past year. The national security legislation hopefully will form the foundation of social order and safety returning to Hong Kong," said Yam.
Yam said the previous two financial crisis in 1997-98 and 2008 had different causes.
"I would characterise the one in 1997 and 1998 as a crisis of financial globalisation. Then came 2008, which was a crisis of financial culture," he said.
The 1998 financial crisis saw Asian currencies including Hong Kong's come under attack from speculators. Yam, as chief executive of the HKMA, spent HK$118 billion to buy stocks and futures to support the markets in August 1998 to drive away the speculators and defend the peg.
A decade later, the global financial crisis was triggered by subprime mortgage loan products sold by leading western banks, which resulted in the US Federal Reserve cutting interest rates to zero and pumping money into the market for the next seven years.
In March this year the Fed cut interest rates to zero again and vowed to keep them there until 2022. Washington and many other governments have reintroduced their quantitative easing programmes in recent months.
"I am in favour of exercising a bit of fiscal discipline and saving a bit more money rather than just spending beyond your means," said Yam.
Yam was speaking in a video interview for the Hong Kong Academy of Finance, which was set up by the HKMA in June last year to invite distinguished leaders to share their insights. The Covid-19 pandemic has forced many face-to-face events to go online.
This article originally appeared in the South China Morning Post (SCMP), the most authoritative voice reporting on China and Asia for more than a century. For more SCMP stories, please explore the SCMP app or visit the SCMP's Facebook and Twitter pages. Copyright © 2020 South China Morning Post Publishers Ltd. All rights reserved.
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