Why Hong Kong's Financial Secretary Anticipates "A Soft Landing"

Henry Tang talks about the overheated mainland economy and the challenges facing Hong Kong

After years of deflation, a property-market bust, and high unemployment, the Hong Kong economy is showing signs of life. And it falls to Hong Kong Financial Secretary and economic steward Henry Tang to keep the recovery alive. If he succeeds, Tang may have a shot at becoming the next chief executive of the former British colony when incumbent Tung Chee Hwa departs in 2007. On May 25, Tang met with BusinessWeek to discuss the risks of a runaway mainland economy, the likelihood of interest-rate hikes in the U.S. and China, the economic challenges facing Hong Kong, and rising concerns about political freedom. Edited excerpts follow:

Do you believe China's economy will slow down?

In Hong Kong, especially, we would like to see China's economy grow at a sustainable pace. The last thing we want to see is very fast growth followed by slamming on the brakes and then speeding up again. When I compare the situation with 1993 -- when [Chinese authorities] slammed on the brakes across the board -- the fact that they have planned controls earlier and more selectively means they are much more sophisticated in applying such measures today. They realize growth is mainly credit-fueled, so they are requiring higher reserves or higher capital, and this will slow some of the growth.

Will China pull off a soft landing?

China is in an evolutionary process, moving from a state-managed economy to a more market-oriented one -- it's gradual, not big-bang. They chip away at the edges as much as they can. [So] I anticipate a soft landing. That's the best result we could hope for. But if there is a hard landing, we will plan for the worst. In many ways we are still very strong, with sizable reserves.

Who really directs China's economic policy?

[Chinese Premier] Wen Jiabao is the focal point on financial policy. Helping him is [Politburo member] Huang Ju. The financial-policy side gets [Wen's] personal attention, but he is also responsible for the overall economic policy.

Do you expect that China will raise interest rates?

I don't see it happening today. But after the U.S. raises its rates, [China] will have more flexibility. If [Beijing] moves interest rates, then [upward] pressure on the yuan will be even greater.

Do you expect Hong Kong to adopt the yuan as its currency anytime soon?

Even when the yuan becomes fully convertible, I don't see us using it rather than the Hong Kong dollar. It's a currency we are all familiar with, and our dollar is pegged to the U.S. dollar. I don't have any intention of reviewing the peg].

Can Hong Kong ever return to the 2% unemployment level seen before 1997 now that the current rate is 7.1%?

It's going to be a huge challenge to get unemployment down to those levels: 2% is not healthy. I think 4% to 6% is full employment. In the financial sector, people can find jobs. But others have a hard time finding jobs in a knowledge economy. Tourism can help [generate jobs]. So we will continue to advertise Hong Kong as a cosmopolitan city.

There's a perception that the recent resignations of Hong Kong radio talk-show hosts were due to political pressure. Has that perception caused any economic fallout?

So far, I don't see any fallout. I don't think the people think the Hong Kong government is behind it. The freedom to express oneself is a freedom that we treasure greatly. I don't want to see anything hinder the freedom of people to express themselves, as long as it is peaceful and legal. Those radio shows continue every morning, and [the new hosts] are as vociferous as those they replaced.

Do you think Hong Kong citizens are now more assertive in defending press freedom and democratic reform?

Yes, they are much more aware of their rights of freedom of expression, and they are not afraid to exercise those rights, which I think is fine. Our society is a rule-of-law society. I'm happy that people are more assertive in exercising those rights.

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