The financial environment in Hong Kong is far better than a year ago when the financial tsunami took the world by storm. In his analysis, accounting expert Tim Lui thinks the road to recovery is still long as there remain certain problems in the US economy that may again affect the world as a whole. Joseph Li spoke to him recently.

The overall global financial picture is very different from what it was a year ago, said Tim Lui, a tax partner of leading accounting firm Pricewaterhouse Coopers. At the time the financial crisis broke out, people were panicking because the impacts were far and deep, while many profound problems of the Western countries also surfaced.

The problem could have spread to and implicated other countries, he said. Given Hong Kong's highly global and international trade activities, the city could have suffered very badly because it is a major exporter of products and professional services, whose close trade allies were in trouble.

"The financial situation has eased and we have for the time being seen some respite, but we still have worries," he told China Daily in an exclusive interview.

"The major reasons why the global financial situation has improved are the heavy-handed interventions from various governments, plus the persistently low interest rate that is close to zero rate but this has generated many problems.

"But we don't know when the governments will withdraw the financial assistance packages. If the governments take the money back, it will generate very big shocks to the market, and so the timing of withdrawal is very crucial."

He noted that various governments have intervened very heavily, including a 4,000 billion yuan rescue package by the Chinese government. People's confidence in the future has been restored, promoting resurgence of economic activities and capital investment from investors.

Lui, somehow, pointed out certain hidden problems of the US economy that may pull the rug out from under a full-scale recovery. "First, unemployment is still rampant at over 10 percent. Again, the Americans have a habit of spending money before earning money through use of credit cards," he said.

"If another round of credit crunch occurs, the US economy will contract once again. It will affect the world at large, because the exports of other countries will definitely decrease as a result of the weakened spending power of the American people.

"For the time being, we can only be cautiously optimistic that we are on the road to economic recovery. Yet if something like a bank run happens, it will bring about very shocking impacts and affect other countries as a chain effect."

Baffled by the financial crisis, many companies saw their performance deteriorate badly in 2008. Given that the global economy is still rather fragile, he reckoned that it will be highly challenging for them to maintain last year's results in 2010.

There is also the question of "hot money" in Hong Kong, he added. Recently, the stock and property markets have both been soaring very rapidly, resulting in "bubbles", but he said the booming market activities are in some way speculative in nature.

"The sky-rocketing prices of 'super luxury' flats will sooner or later implicate the middle- and low-priced flats. The property market is a very delicate and controversial issue, with some people wanting it to go up and some wanting it to go down.

"Recently, we have seen many companies obtaining a listing in Hong Kong, but does it really mean the market is very buoyant? As far as I know, the listings had been in the planning stage for some time prior to the financial turmoil, but were delayed owing to the adverse financial situation in Hong Kong," he said.

"The government does not want to interfere too much with the property market and is afraid of fluctuating prices. The reason is when prices soar high, it must then go down drastically," he explained. "And when property prices are high, the government will increase the land supply. Because when they fall drastically, they will affect people's confidence, domestic consumption and the banking system."

During the difficult times, he was aware that many enterprises, encountering bleak business prospects and shrinking profits, had to resort to cost control measures to cut cost.

Generally, total cost is composed of three components namely rent, wages and other costs. While rent is quite invariable as a fixed cost, he noted that many enterprises seek recourse to various measures such as pay cuts, no pay leave and a four-day week to achieve savings.

In cutting other expenditures, he said Pricewaterhouse minimized the number of business trips.

For example, the 400 partners of Pricewaterhouse worldwide come together for an annual meeting every year to discuss work plans. Due to the inhospitable financial climate, the 2009 annual meeting was cancelled and video conferences were held as an alternative to the meetings.

"The cost-saving measures have proved quite effective and we will continue such measures in 2010, until such time as we find the situation improves," he said.

Talking about the local economy, Lui said he was a little bit worried even though unemployment has stabilized. Sounding a cautionary note, he said: "The influx of hot money has created bubbles in the asset markets. If a huge volume of hot money is withdrawn suddenly, it will produce damaging impacts on the economy. But as the hot money comes and goes, I only hope it will exit gradually, slowly and will not result in a large-scale withdrawal."

After the outbreak of the financial crisis in September 2008, the government implemented a range of rescue measures to save the economy, support enterprises and preserve jobs. Among other things is the special loan guarantee scheme to enable small and medium enterprise to borrow from the banks to weather the difficult times.

The scheme has worked very well, said Lui. With the government providing the guarantee, then banks are more willing to lend money to small and medium enterprises to ease their cash flow.

Although the scheme involves the taxpayers' money, he was pleased to note that the government has extended the scheme by six months until end of June 2010.

"The government is right to extend the scheme until economic recovery and the return of orders from overseas markets are solid," he said.

Talking about the financial tsunami that first broke out in the US and then swept the world, Lui said the crisis stemmed from both human avarice and ineffective corporate governance.

It was from sheer greed that the Wall Street financial executives were asking for enormous salaries. In meeting their huge salary demands, the financial corporations had to come up with countless new products such as mini-bonds to attract customers, promoting the incident and allowing it to snowball until it crashed and collapsed.

"After the Lehman Brothers saga, Hong Kong people have become wiser, while the local banks have found it very hard to sell their new products, so the price they have had to pay is very big," he said with a laugh.

(HK Edition 01/08/2010 page4)