Sure, It’s A Failed State. But You’ve Got $1,284 Comin’ Your Way!

Hong Kong is handing out free money to every adult permanent resident, and I imagine that probably rubs some hard money types the wrong way.

Maybe I’m constructing a strawman. Perhaps this is one time when those who normally lampoon all manifestations of “helicopter money” are in a charitable mood considering the city’s dire circumstances.

But somehow, I doubt it. I’d wager that all the usual critics are panning the $1,284 cash handout unveiled on Wednesday, alongside the budget, which showed an estimated deficit of HK$139.1 billion for the upcoming fiscal year.

If you’re among those panning the cash handout because it offends your fiscal sensibilities, then you should note three things (presented in reverse order of importance):

  1. You lack any semblance of empathy
  2. Your version of economics is hopelessly dated, and manifestly cruel
  3. Rational people are also irritated with the cash handout, but not because it’s too generous, rather, because it’s wholly insufficient in the face of a veritable economic catastrophe

That last point is the most crucial: This manifestation of “helicopter money” is to be lampooned not because it’s free money for the masses, but rather because it’s woefully short of what’s needed to make a dent.

This is at least the third time Hong Kong has tried cash distributions (2018 and 2011 being two additional historical cases) and it comes just days after Singapore unveiled its budget, which includes smaller payouts for households.

Again, the problem here isn’t the “free money” bit, but rather the fact that it isn’t targeted and it’s not enough (it’s not even clear what “enough” would be at this point).

In all likelihood, people are just going to save this money. Who wants to go out and spend at a time when the entire region is, to varying degrees, on virus lockdown? And even if COVID-19 weren’t a thing, the city would still be beset with social unrest, which manifested itself in all manner of violence last year, with the end result being a deep recession.

For those who need a reminder of just how dire this situation really is, have a look at the following chart, and do note that the orange bar (i.e., YoY exports for January) represents the worst plunge since 2009.

Sorry (not sorry), but there is no supply-side fix for this situation.

Of course, there isn’t a demand-side fix either as long as the virus keeps the city on lockdown and protests make it virtually impossible for businesses to operate. But once those two headwinds abate, only massive fiscal stimulus will be sufficient to get Hong Kong back on its feet.

Feast your eyes on this rather stark visual:

(Deutsche Bank)

At the risk of overstating the case or otherwise trafficking in hyperbole, Hong Kong is about to become a failed state – or I guess “failed city” is more accurate.

The support measures in the new budget – worth more than 4% of the city’s 2018 economic output – are ostensibly aimed at helping everyone from students to business owners to investors, but it may be too damn late.

Financial Secretary Paul Chan called the current economic environment “tough” and promised to “adopt an expansionary fiscal stance and make optimal use of fiscal reserves to implement counter-cyclical measures” with the goal of “supporting enterprises, safeguarding jobs, stimulating the economy and relieving people’s burden, so as to help Hong Kong tide over the difficulties”.

Forgive me, but all of that seems like a laughable understatement. Chan says the economy could contract by as much as 1.5% this year or expand by as much as 0.5%, and Bloomberg economics says a 0.4% contraction “still looks reasonable”.

I guess that depends on one’s definition of “reasonable”.

Right now, the city is in something that looks like terminal decline. The virus is likely to weigh heavily on an already beleaguered tourism industry and further cripple the retail sector, and once the health crisis is over, it seems “reasonable” to suggest that folks will be right back to protesting in the streets.

One local I spoke to recently lamented that Hong Kong “no longer seems like a good growth market”.

I’d say that’s putting it mildly.

Details of the cash payout from the budget speech

34. The social incidents in the past months and the novel coronavirus epidemic have dealt a heavy blow to Hong Kong’s economy.

35. In the face of an economic downturn, we expect a decline in government revenue in the coming year.  The Government must exercise fiscal prudence to ensure healthy public finance.  That said, I believe that the Government should also do a bit more, notwithstanding the fiscal deficit, when we are facing an economic setback and overwhelmed by a heavy atmosphere.

36. After careful consideration, I have decided to disburse $10,000 to Hong Kong permanent residents aged 18 or above, with a view to encouraging and boosting local consumption on the one hand, and relieving people’s financial burden on the other.  This measure, which involves an expenditure of about $71 billion, is expected to benefit about seven million people.  The Government will announce the details of the scheme as soon as possible after obtaining funding approval from the Legislative Council (LegCo).

37. I have to emphasise that, although the cash payout scheme involves a huge sum of public money, it is an exceptional measure taken in light of the current unique circumstances and will not, therefore, impose a burden on our long-term fiscal position.  I consider that, with ample fiscal reserves, the Government has to increase public expenditure amid an economic downturn to stimulate the economy and ride out the difficult times with members of the public.


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