After plunging nearly 400 points, or about 2 percent, ahead of the first-half earnings reports from the major banks, the Hong Kong stock market rebounded sharply, recovering all lost ground in the following two trading sessions last week.

Leading the surge were financial stocks with HSBC, the largest bank in Hong Kong, at the front while its subsidiary Hang Seng Bank was tracking close behind. Property stocks were also doing well despite the retail slump which is hurting some developers that derive a substantial portion of their income from rentals from commercial properties, including shopping malls.

A combination of factors is seen to be stoking the stock market rally that began in early July. These include the influx of overseas capital, or hot money, the end of the property down cycle and increases in consumer spending in contrast to the slump in tourism spending.

Some stock analysts have remained skeptical about the sustainability of the rally, citing uncertainties that have continued to trouble the global economy. But even the pessimists have agreed that the latest rally which sent the benchmark indicator to the highest point since mid-2015 is underlined by vastly improved investor sentiment from just a couple of months ago.

Growing confidence in an economic recovery in the second half year was manifested in the increase in prices and turnover in the property market. The official property price index shows that average home prices began to rise in May, reversing a down trend since late 2015. Property agents have reported significant increases in transactions in both the primary and secondary markets.

The question is what the government should, or can, do to help maintain the momentum of the recovery. Traditionalists would argue that the government should do less, rather than more, to avoid competing with the private sector for financial and labor resources when demand is expected to rise in tandem with the projected increase in economic activities. But this old-school economic policy has largely been rejected by a more proactive approach which calls for greater government intervention despite having limited tools.

The linked exchange rate system has largely ruled out the use of monetary stimulants which could upset the peg to the US dollar. Even without this constraint, it's doubtful if lowering interest rates from their already very low level can have much of an effect on boosting economic growth. Easy credit is already made available to almost anyone who needs it. There is really little point in making that even easier by pumping money into the system.

Sitting on a reserve fund totaling $360.3 billion, the government has a wide choice of fiscal tools at its disposal to fine-tune the economy. Indeed, the colossal spending on infrastructure development in this and previous fiscal years is seen to have helped pushed up GDP growth at a time of shrinking expenditure in other sectors, particularly exports and private sector investment.

Financial Secretary John Tsang Chun-wah has said that handouts in the fiscal 2016 Budget, including tax rebates and direct subsidies, would have the effect of indirectly boosting economic growth by an estimated 1 to 2 percent, which, he reminded us, would be of great significance when overall growth was projected to be below 3 percent.

This has made some economists wonder if it is necessary for the government to do an interim budget taking into account the fast-changing external factors that are having an impact on Hong Kong's increasingly complex economy. Doing so would give Tsang the flexibility in introducing new fiscal stimulants to further strengthen public confidence in the economic recovery in the remaining months of the year.

Despite repeated urging by developers and property agents, the government has remained adamant that the time is not ripe for the removal of the restrictive measures that were introduced several years ago to cool down the property market. But it may want to consider lifting the 30-percent down payment for mortgage loans.

Some banks are offering borrowers personal loans on top of the mortgages to circumvent the restriction. The finance companies of some of the largest developers have gone a step further by offering 100 percent mortgage financing to buyers of apartments they developed.

The rule was introduced, at least partly, to protect the banks from the possible collapse of a market that was considered to be dangerously overheating. The market adjustment that has sent average home prices down more than 10 percent from the peak late last year is seen to have greatly mitigated the risk of a crash.

Removing, or lowering, the initial deposit for mortgage loans can send a signal that the market is returning to normal. The health of the property market is of great importance to the overall economy because a large proportion of personal and corporate wealth is tied up with it.

The author is a veteran current affairs commentator.

(China Daily 08/12/2016 page12)