Businesses under attack don't hire

Around the world businesses are under attack - increased taxes, more onerous regulations and the explicit or implicit risks of more to come. Obamacare, carbon taxes, higher consumption taxes, Dodd-Frank and its equivalents and so on are becoming a global epidemic.

Likewise the "rich" (insert definition of choice, but basically the western world's declining middle class as well as genuinely wealthy) are under attack from rising tax burdens, rising living costs (e.g. education and health care) and face widespread threats of more (the "rich" should pay more etc).

Regardless of the merits of individual proposals (and most are nothing more than a naked grab for revenue so governments unable to live within their means can make electoral bribes to people who, for the most part, take from rather than contribute to the cost of running the country), one of the consequences of the attacks on businesses and taxpayers is that they feel threatened. People who feel threatened don't spend - they go into survival mode:

• businesses (especially smaller businesses) don't invest in expansion and don't hire - they conserve their cash rather than risk it


• taxpayers (especially the middle class) faced with the prospect of rising taxes will cut back spending where possible (discretionary consumption spending and charity being the easy cut backs) - they pay down debt and build emergency funds


• investors divert money away from risk assets into safer investments - in particular government issued or backed securities which do much less for economic expansion than many other forms of investment

Simple message - if you want businesses to invest in themselves and create jobs, take away the threats. This is especially true for countries which do not enjoy a low cost labour advantage.

And yes, I had far too much to drink last night.

Cosco Pacific purchased

This afternoon I made a small incremental purchase of Cosco Pacific (HK:1199). The additional shares cost HK$9.52.

A tightening market for mortgage finance

This week both Citibank and BoCom announced that they would no longer be offering residential mortgages (in Bocom's case "traditional" mortgages). Although not as publicly announced, other banks have been tightening their lending criteria beyond the cooling measures imposed by the Hong Kong government. As a matter of anecdotal support, the bank which has loaned my most of my outstanding mortgages has told me that they will not lend me any more money.

The driving force behind the tightening of the mortgage market is the steady rise in the loan to deposit ratio in the Hong Kong banking system. For HKD deposits, the ratio has risen from around 65.1 in October 2009 to 85.9 in August 2011. A similar increase occurred in the all currency ratio (from 50.1 to 67.9). These ratios reflect an increase in total lending by Hong Kong banks (currently the highest since 2006 which was the earliest year in the HKMA table I was looking at).

Given the tightening of the mortgage market (higher deposits, more stringent borrower evaluation and higher interest rates) and lower turnover in the property market, one would expect that the value of mortgage loans would be falling. It's not. In fact the total value of outstanding residential mortgage loans hit an all time high in August.

Although speculative, I suspect that many borrowers (including myself) are unwilling to repay loans early. HIBOR linked loan taken out over the few years before the tightening began are still paying less than 1% on those loans. Not only is this a negative real interest rate and well below the yield on property, but new loans are more expensive (likely 2-2.25% depending on which bank you approach) and harder to obtain.

For my part, I have no intention of paying off any of the loans on my investment properties early and am increasingly coming to the view that I should not pay off the loan on my home early either. I can revisit if HIBOR starts rising.