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To: Alex who wrote (12497)	6/2/1998 6:37:00 AM
From: Gabriela Neri	Respond to of 116912

The beautiful simplicity of it all in words so eloquent written by Andy Xie of Morgan Stanley: An asset bubble can only be sustained by external liquidity. When Japan's bubble burst in 1990, the subsequent outflow of Japanese liquidity fueled credit bubbles throughout Asia. In economies with no control over asset supply, it led to overinvestment. In Hong Kong, with tight control over land supply, it led to asset inflation. Japanese liquidity no longer flows into Asia. Instead, it is going to Europe and the US. It is unlikely that Hong Kong can sustain its property bubble in the current environment. The Hong Kong government, in the end, will have to cut taxes or even give tax rebates to stop the economy from sliding further. The deflation of an asset bubble is contractionary, which leads to a rise in the savings rate in response to diminishing wealth. The only effective macroeconomic tool, in the absence of a monetary policy, is to reduce taxes. Hong Kong has accumulated fiscal reserves equivalent to one-third of GDP. This is the time that the government should deploy these resources. As the newly elected legislature starts to put pressure on the government, we believe that Hong Kong government will have to cut taxes. Any delay, though, would reduce the effectiveness of such a policy.