Hong Kong Hoards the Cash

The squirrel obsessions of Hong Kong's ruling bureaucracy are becoming ever more apparent as the economy weakens. Secure in their high-paying own jobs and inflation-proof pensions, they plead the potential poverty of public finances for crafting a budget for the coming fiscal year with a deficit of just HK$36 billion or 2.3percent of Gross Domestic Product.

Quite apart from failing to do much for its own citizens, Hong Kong is failing the world on which it relies for its economic prosperity. Almost every government in a position to do so is stimulating its economy with massive deficit financing. But the government with one of the world's strongest fiscal positions is playing Scrooge.

Given the dire global circumstances and the mainland's own valiant efforts to spur domestic demand through deficit spending this is mean enough in the context of fiscal reserves estimated by the government to be HK$488 billion at the end of this month.

But the fiscal situation is actually far, far better than the usually quoted data suggest so meanness is far, far worse. The published fiscal reserves are just half, or less, of the actual reserves held by the government, supposedly on behalf of the people. On a cash accounting basis they are roughly double those officially stated and on the basis of accrual accounting on a consolidated basis are nearly three times the published number.

The main additional reserve items missing from the cash accounting budget presented to the public are as follows: (The Monetary Authority data is at end-2008, the others at the end of the 2007/08 fiscal year).

  • HK$480 billion in the reserves (undistributed profits) of the HK Monetary Authority's Exchange Fund, a part of the government which comes directly under the control of the Financial Secretary. Contrary to the misinformation put out by officials, this surplus is not required to defend the Hong Kong dollar peg to the US currency. At its most basic level, the peg is supported by the convertibility of the note issue into US dollars. This is backed by assets separate from the Monetary Authority reserves. Most of the fiscal reserve is also in foreign currency and could be switched into HK dollars if necessary to help defend the peg. However at the end of the day the peg can only be protected by raising interest rates and squeezing the HK dollar money supply. In other words, most of this reserve should be handed over to the Treasury and added to the fiscal reserves. This would only require an accounting change as in practice all these funds are managed as one by the Monetary Authority.

  • HK$65 billion in the Capital Works Reserve Fund. Every year the government allocates money to this from land sales and subventions from the operating budget. But in most years budgeted allocations are not fully spent so now this fund is sitting on a cash hoard representing approximately two years worth of capital spending. But a deceitful government hides it away in detailed accounts which are available but only to those who know where to look.

  • HK$18.5 billion in the Civil Service Pension Reserve Fund. This should be completely unnecessary. It exists supposedly to protect retired civil servants from the possibility that sometime in the future the government is unable to pay pensions from operating revenue. But if the government is really concerned about such an eventuality it should fund from its other reserves existing liabilities under a normal defined contribution pension scheme and then contribute annually from the operating budget. This fund should either be handed over to the fiscal reserves or become part of a properly funded scheme for civil servants.

  • HK$19 billion in the Loan Fund. These are government loans to citizens for housing and education. They should be sold to the private sector and the cash transferred to the fiscal reserve. If government wants to subsidize some people – mostly officials – it should do so from recurrent revenue.

  • HK$6 billion in the Lotteries Fund. This is money raised from lotteries which is supposed to be spent on social projects but in most years in under-spent, hence the accumulated surplus.

  • HK$4.6 billion in the Innovation and Technology Fund. Feel-good budget allocations to help technology development accumulate under-spent because of lack of suitable projects or the cumbersome bureaucracy administering them.

  • HK$150 billion in the Land Fund. This fund has no purpose whatsoever other than to hide the extent of reserves. It was created to cope with the unusual circumstances affecting land sales revenue in the lead-up to the 1997 handover. Since then it has had no function. It should form part of the fiscal reserves.


In sum then there are some HK$660 billion sitting in reserves which should form part of the fiscal reserves. They are mostly managed as part of the Exchange Fund and most are in government bonds, cash and other liquid securities.

But that is not the only way of looking at the government's position. The above is based on cash accounting, normally used by the government for budgetary purposes. However, it also publishes a consolidated statement on income/expenditure and liabilities/assets on the accrual accounting basis normally used by businesses.

This shows that as at end-March 2008 the government has net assets of HK$1,219 million even after making a provision for future civil service pensions of HK$497 billion. To the various funds listed above are added the net worth of the government's holding in various revenue generating businesses in which it has a stake of more than 20percent. The major ones are the Airport Authority, the Mass Transit Railway Corporation (which now also controls the Kowloon-Canton Railway), the Post Office and Hong Kong's Disneyland (the 57percent owned HK International Theme Parks Ltd). These businesses have a total worth of HK$238 billion.

Other assets include the wholly-owned Housing Authority, various revenue generating tunnels and bridges, and HK$280 billion in assorted buildings and infrastructure included at cost less accumulated depreciation.

It could well be argued that the last HK$280 billion, deemed "heritage assets", should be excluded on grounds that they cannot readily be monetized or are required for the delivery of essential services such as education and policing. However, even excluding them while including future pension liabilities leaves the net worth of the government at around HK$1 trillion, mostly in liquid or readily privatized assets.

The pension liability assumes a discount rate of 5 percent and makes provision for future salary increases and promotions. Thus it is conservatively stated and is unlikely to increase as it relates mainly to a defined benefit scheme for civil servants to which there have been no new entrants since 2000. Those joining the civil service after that date are on defined contribution schemes with the employer contribution being met from recurrent revenue.

The bureaucracy has not merely been very mean about the resources it controls on the public's behalf. Its ready access to cash has encouraged it to spread its tentacles into areas which should be the preserve of the private sector. The Monetary Authority has been particularly active, creating and now expanding the Mortgage Guaranty Corporation and buying a substantial stake in HK Exchanges and Clearing, which has the stock and futures market monopoly, and subjecting it to inappropriate political meddling.

This squirreling away of reserves has thus become not merely damaging to the macro economy at a time of urgent need, it has been positively damaging, spreading the power of the civil service and those aligned to it and wasting huge sums of public money on ventures such as Disneyland.

In short it believes in "small government" when it comes to delivering the services and supports which are the main duty of governments, and in "big government" when it comes to acquiring assets which it can control.