Hong Kong Monetary Authority

Capital investment scheme's great sleight-of-hand trick

PUBLISHED : Sunday, 27 May, 2012, 12:00am
UPDATED : Sunday, 27 May, 2012, 12:00am

'We want to enhance the competitiveness of this [Capital Investment Entrant] scheme. As you know, many countries are thinking of ways to attract capital.'

Benson Kwok Joon-fung
Assistant principal immigration officer

Did you hear that thumping noise just now? That was me banging my head against the wall. It's the only thing to do when immigration bureaucrats are allowed to deem themselves experts on capital investment.

Let's get some things straight about the Capital Investment Entrant Scheme, which gives Hong Kong ID cards to mainlanders if they first buy passports from other countries and then put a minimum of HK$10 million into approved investments here. A total of 14,512 of them have so far done it.

This scheme does not bring any new money into Hong Kong. It does, however, put unwelcome strain on the linked exchange rate system and contributes significantly to pushing up home prices beyond the reach of ordinary residents.

I hear you. How can I say it brings in no money when 14,512 people have brought in millions of Hong Kong dollars each? Let's follow the trail of one such person with Canadian dollars. He goes to the Royal Bank of Canada here in Hong Kong and says, 'Please deduct C$1.32 million from my account with your bank in Toronto and credit me here with the Hong Kong dollar equivalent, which is HK$10 million.'

The bank does so and the result of this transaction is that HK$10 million previously held here by the bank, or another of its clients, is now held by our man. No Canadian dollars ever left Toronto and no Hong Kong dollars ever came into Hong Kong.

What only happened is that some Canadian dollars in Toronto have a new owner and some Hong Kong dollars here have a new owner. Changes to balance of payments do not create new money.

That's not all. In October 2010, it dawned on our bureaucrats that our property market was overheated and that this scheme fuelled the fire by encouraging rich mainlanders to buy property. They removed property from the list of approved investments. But, undermining this change, they applied it only to new applicants. Existing ones on the long waiting list continued to be eligible to buy property.

Property purchases under the scheme grew even faster immediately after this change. As the first chart shows, the amount invested in property has actually doubled since October, 2010.

The Hong Kong Monetary Authority also has reason not to love you. It has an intervention level in the foreign exchange market of HK$7.75 to US$1 and, as the second chart shows, the exchange rate regularly bumps up against this level, forcing the HKMA dealing room back into the ring to wrestle the exchange rate closer to the official HK$7.80 level.

I don't know how many rounds this bout has had but if I were in the HKMA's shoes, I would be getting a little weary by now and unhappy to see fellow civil servants make things worse by encouraging outsiders to bid up Hong Kong dollars.