Return Investment Gains to the People


By Philip Bowring

SCMP November 10 2010

The Community Care Fund (aptly dubbed the Community Collusion Fund) is not the only example of the official failure to guard Hong Kong's fiscal interests. Legislators who purport to represent business, labour or professional sectors should be making common cause against officialdom which uses every device to evade scrutiny by siphoning off public money into funds.

Given the determination to stick with the US dollar peg, it is no one's fault that the value of HK-dollar denominated assets has been falling fast in terms of other currencies.

But it is obvious that the government's insistence on running fiscal surpluses and then failing to distribute them to the public has not been the conservative policy claimed. The real value of those surpluses, mostly invested in low-yielding US government paper, has steadily eroded. How much better it would have been to spend HK$25 billion on cleaning up the local atmosphere than see that frittered away over the past few months alone, by investing most of the HK$585 billion of government fiscal reserves and funds in assets with negative real yields and which buys less and less from China, Japan, Europe etc.

How much better it would have been for all concerned, except government officials, if a large part of the fiscal surplus back in 2000 had been credited to the MPF accounts of those who had earned it, and could have been invested in a mix of assets and currencies.

But squirrelled away in the Exchange Fund, the fiscal reserves have risen very little over the past decade - from HK$417 billion to HK$517 billion despite a net surplus over that period and despite the decline of the HK dollar against most currencies.

Contrast this poor return to public funds subject to a modest amount of scrutiny with what has happened to the Exchange Fund's accumulated surplus. A decade ago this was HK$291 billion. Since then it has doubled to HK$595 billion. How come? As the Monetary Authority gives scant account of itself, one must adduce three main reasons at a time when the fiscal reserves, and inflation, were close to static.

First, it is allowed by the chief executive and financial secretary to retain and reinvest its profits. Why? It certainly has nothing to do with defending the currency. It simply allows the bloated HKMA to expand its empire without scrutiny.

Second, it has been investing some of its assets in equities - as citizens themselves would have done had the money been returned to them.

Third, as it invests in currencies other than the US dollar, it makes profits from the decline of the HK currency. In other words, while investors in Hong Kong- and US-dollar paper lose money. Yet it is not required to distribute the gains to their rightful owners, the public.

There is nothing new in this long-term erosion in the value of fiscal surpluses and HK-dollar interest bonds and bank deposits. Back in 1985, soon after the HK dollar was pegged, the US dollar was worth one SDR (Special Drawing Rights), the International Monetary Fund's unit of account which is a currency basket in which the dollar itself has a 40 per cent weight. Today a US dollar is worth just 0.63 of an SDR. Meanwhile, too, Hong Kong small savers - that is, most of the lower-income groups - have also seen years of bank interest rates below inflation.

The HKMA managers, like the property developers, seem to think they are clever getting ever richer. They are in fact the beneficiaries of a financial and fiscal system which penalises the saving public in favour of government agencies and a small group of businesses. Given a pegged exchange rate and an open economy, Hong Kong may not be able to do much about negative real interest rates and currency decline. But legislators must demand that investment gains be credited to the public rather than left to be played with by unaccountable officials.





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