Scandal of HK's vanishing savings
SCMP November 27
Dear Scrooge, this is addressed to you as a collective headed by bureaucratic lifer Donald Tsang Yam-kuen and pantomime cat John Tsang Chun-wah. As you will be formulating your budget for next year as Christmas and other times for giving approach, you should begin your deliberations by taking note of the following:
Between 1970 and 1979, the consumer price index average (for the bottom half of Hong Kong households) was 7.6 per cent and the average interest rate on savings deposits was 3.8 per cent; in the 1980s, the CPI was 8.9 per cent and the interest rate 6per cent; in the 1990s, the CPI was 6.9per cent, with the interest rate at 3.5 per cent; and, from 2000 to 2011, the CPI was 0.5per cent and the average interest rate was 1 per cent.
If you want to understand why so many elderly people in Hong Kong are desperately and disgracefully poor, stop implying that they should have saved more for their old age rather than rely more on government handouts. Overpaid bureaucrats with inflation-proof pensions may find it hard to understand such simple things, but these figures show just how savings have been eroded over these past 40 years. Savings accounts are not only the largest single part of the Hong Kong dollar deposits base, they have been the principal savings medium for lower-income groups. Even assuming that some savings were in slightly higher yielding time deposits, savers are still looking at an average loss of 2per cent compared with the 2.5per cent annual post-inflation returns expected from the most conservative long-term investment forecasts. Just imagine the compound interest impact of minus 2per cent over 40 years.
The only period of sustained positive real interest was during the period of deflation (2000 to 2004) - which was also when wages fell and unemployment rose. With inflation now at over 3 per cent and interest rates at zero, net, real losses to savings accounts which total HK$1.7 trillion are running at over HK$50 billion a year, or almost as much as the government will collect in land sales revenue this year.
These two figures, land sales income and net losses for depositors, are directly connected. They go to the heart of the issue of who profits from the erosion of the real value of bank savings. The very first of these is the government itself. Its income from land would be very much smaller if interest rates were positive in real terms. Add negative real interest rates to the government's control of land supply and you have a very large part of the reason why it will not only have a massive surplus this year but has had one for most of the past 40 years. It explains why the government surplus (including the Monetary Authority surplus) now totals around HK$1.2 trillion, or 70 per cent of the accumulated savings deposits of seven million Hong Kong people. They claim this is 'small government'. What a fraud.
The government cannot necessarily be blamed for negative real interest rates, given the US dollar peg and the era of very high global inflation in the 1970s and early 1980s. However, it can be blamed for adding to its impact. The response of the public has been, naturally, to favour property investment as an inflation hedge as well as a home. But, given the government's land policy, this produced the land price spiral which has done so much to increase income and wealth disparities. Those able to get on the home ownership bandwagon have mostly benefited from the real losses suffered by depositors, but paid a heavy price to the government for doing so. The many who have not been able to get on the first step of property ownership, but who have saved as much as they could through the banking system, have lost out massively.
The other beneficiaries have been the property giants, especially those who acquired large land banks in the past, and the banks, which continue to enjoy fat lending margins. For 40 years, the best lending rate has been around 5 percentage points above the savings deposit rate.
By extension, the profits boom for the property and banking companies flowed through to the stock market, where these two sectors were almost completely dominant until the relatively recent arrival of mainland listings. Even today, direct participation in the stock market is a minority pursuit. Before the advent of the Mandatory Provident Fund, broad-based investing was out of reach for low- and even middle-income groups. The masses might occasionally gamble on specific stocks during bouts of euphoria. And, mostly, they lost out to the financial-industry spivs during these periods of excess.
Thus, we are now at a point where the population is ageing fast, poverty among the old is high and getting worse, and only those lucky enough to have been able to acquire property two decades ago and have gone on saving since then are likely to have sufficient to see them through old age. On the other side of the ledger is the HK$1 trillion of government financial assets.
Officials like to attribute this hoard to their own thrift and good sense. In practice, they are simply defending their own selfish interests as multiple-flat owners and friends of the developers and bankers who have similarly profited from the vast transfer of wealth from savers to borrowers (the government is a borrower from the public at large). Hong Kong doesn't need an Occupy Wall Street or even HSBC. It needs 10,000 elderly folk to occupy that new glass Tamar blockhouse into which Scrooge Inc has barricaded itself.