Hong Kong’s Masters of the Universe

Hong Kong is edging ever more towards a Singapore-style corporate state in which a significant part of the community's commercial and financial assets are controlled by a political and bureaucratic elite.

While Singapore has always made a virtue of this state involvement in ownership of assets, local and foreign, the Hong Kong government continues to pretend that it is merely a facilitator, not an owner.

Yet what has long been clear to critics is now being admitted: the Hong Kong Monetary Authority does not simply exist as a guardian of the monetary system and the manager of the government's fiscal reserve. It is a self-aggrandizing behemoth administered by bureaucrats outside the purview of the political system and responsible to no one except, nominally, the Financial Secretary and in practice the Chief Executive.

Despite the problems that Singapore's state investment companies have had from believing the talk from Wall Street's arrogant big hitters, Hong Kong now seems to be following the same path for reasons that can only be guessed at.

The HKMA's recently retired boss Joseph Yam, who had held the position since its 1993 creation, was recently quoted in the Financial Times as admitting that "you don't need all of the funds to keep the Hong Kong dollar stable." So instead of returning the surpluses to where they belong - the government fiscal reserves and ultimately Hong Kong's citizens - the HKMA officials have taken it on themselves to get into bed with the Wall Street gang of high profile private equity and hedge fund names believed, according to the usually well informed FT, to be Blackstone, Bain and KKR.

Given the secrecy with which the HKMA conducts its affairs, no specific information is available either on the nature of its investments, the intermediaries, the partners or the amounts of public money involved. Singapore's Temasek Holdings and even its big brother the Government Investment Corporation are now models of transparency by comparison. Singapore also keeps some separation between its Monetary Authority, as financial market regulator, and its two state asset holders.

The HKMA's total assets are (end-February 2010) HK$2.201 trillion (approximately US$282 billion) of which 93 percent are in foreign currency securities. There are four main components of the HKMA's balance sheet: amounts deposited by banks and governments as counterpart to their HK dollar note and coin issues (HK$225 billion); deposits from banks and issues of Exchange Fund notes totaling HK$700 billion which reflect its true central banking function of monetary and banking management; HK$600 billion in government deposits, of which HK$549 billion are fiscal reserves and HK$50.8 billion the balances of government budget funds; and last but by no means least the accumulated surpluses of the HKMA itself, which now total HK$542 billion.

The latter is the key to the HKMA's desire to get into speculative asset purchases beyond the oversight of the public or Legislative Council. The huge sum represents years of profits which in principle should have been paid out to the government treasury and form part of the fiscal reserves. But squirreling them away in the HK has enabled the government to pretend that that fiscal reserves are much smaller than they really are. They provide the HKMA's executives with funds which not only allow it to enter into businesses which properly belong entirely to the private sector, but now to enable the managers to indulge in non-transparent risk taking.

Hitherto there has been a pretense that all these excess reserves were necessary to protect the US-dollar pegged currency. But that was always nonsense. Under currency board systems, pegs are maintained primarily through money supply and interest rates, not through intervention using foreign exchange reserves. The note issue is fully backed by foreign currency and total HK dollar base money is only HK$694 billion (HK$210 in note and coin issues and HK$483 billion in demand deposits).

Now that the HKMA is admitting that it does not need all this money to be kept in liquid assets the Hong Kong public and politicians need, as a first step, to claim it for the Treasury rather than hand it over to whatever financial intermediaries or spiv funds take the fancy of the HKMA officials. Given that it represents the earnings of the Hong Kong community over three decades, the best use would be to inject much of into the accounts of Mandatory Provident Fund members in accordance with their years of work - not years of membership of the MPF, which is only 10 years old. This would help address what is likely to be Hong Kong's biggest problem over the next two decades - a steep rise in the numbers of old people with totally inadequate pension provisions (except civil servants and HKMA employees with very generous taxpayer-funded ones).

However it seems more likely that the HKMA will continue to act in an unaccountable and arbitrary fashion. Its empire-building tendencies are well illustrated by its offshoot, the Mortgage Corporation. It has never been clear why Hong Kong needed this body given the ready availability of mortgage finance from banks. Interestingly it was justified as Hong Kong's equivalent to Fannie Mae, an organization which in recent years did untold harm to the US financial system. Its main effect has been to push up housing prices by making credit even easier to obtain while government policies deliberately restrict new housing supply.

Not content with using its government-backed credit rating to provide indirectly subsidized credit, the Corporation has not only expanded overseas but has taken to financing other things such as taxi licenses.

The HKMA now looks even more likely to become an ever-expanding gravy train for the bureaucracy and those connected to it. It pays even better than the already well-paid other top officials. Most of its senior staff have come up through the civil service. But at least under the bright and sometimes arrogant Yam, the HKMA had a high level of independence which brought benefits in terms of technical competence and conservative asset management.

The new chief executive, Norman Chan is the consummate bureaucrat insider. A lifetime civil servant, he was earlier at the HKMA but his last job was as Director of the Office Chief Executive Donald Tsang. He was also in 2006 the founding chairman of the Bauhinia Foundation, which purports to be a think-tank but in reality is just a stalking horse for official policies and Beijing-oriented views. His decision to enter the world of hedge funds and private equity suggests that empire-building and use of public assets for dubious ventures and un-transparent capital market plays lies ahead. Maybe it's time for Hong Kong to invite Singapore's Ho Ching to give a lecture on learning the hard way about the perils of civil servants trying to be hot-shot asset players and swimming in the same waters as Wall Street's great white sharks.