Introduction

Just before Lehman Brothers collapsed, one could hardly say that an asset market bubble was about to burst in Hong Kong. Stock prices had already declined by about one third since the last quarter of 2007. Average housing price was 30 per cent lower than the peak in 1997. The real economy had slowed down, but it was not in severe difficulties. There were no obvious reasons for the Hong Kong Government to stimulate or cool down the economy. Had the global financial crisis not occurred, we would expect that the government would have allowed business to continue as usual. Thus, the crisis provides us with a valuable opportunity to learn how it would respond to a crisis caused by external factors.

The Policy Address of the Hong Kong Government, an important annual event summarizing its views and policies, was delivered by Chief Executive Donald Tsang on 15 October 2008, one month after the fall of Lehman Brothers. This allowed enough time for the government to formulate a preliminary interpretation of what the crisis was, and consider its own possible reactions. The Policy Address clearly regarded the crisis as a severe economic shock coming from outside. Although the government found it “impossible to ascertain its adverse impact”, it tried to portray an image that appeared to be positive. The Chief Executive announced that he would form a task force “to address the challenges”, help the government to turn the crisis “into new business opportunities and enhance (Hong Kong's) competitiveness.” But what was the guiding principle behind the government's policy formulations?

The Policy Address reaffirmed that the principle was “Big Market, Small Government”. In a press release on 19 September 2006, Donald Tsang defined it as follows: