Policy problem is lack of sense, not dollars
MY FAMILY IS one of teachers - father, brothers, sisters, all of them in the same trade, one that I thought I had escaped. I see the need here, however, for an introductory lesson to some basic principles of the balance of payments.
Imagine that you are a relatively wealthy person living abroad whose big goal in life has always been to live in Hong Kong and get a Hong Kong ID card. We shall ignore the question of whether your intelligence matches your wealth if this is such a big goal for you and if you have found difficult what tens of thousands of people each year find relatively easy.
The point is that the Hong Kong government is on the verge of opening the door to you. All that you will need to do by the end of this year is bring in HK$6.5 million under a new Capital Investment Entrant Scheme, put it into a range of improved investments and heaven on earth can be yours, too.
Superb, you tell yourself, and you head down to your local bank branch in whatever place you live to collect the necessary $6.5 million from your bank accounts.
There is a problem, however. Your bank manager tells you that you have no Hong Kong dollars in any accounts you maintain with him. This is understandable. You have no use for Hong Kong dollars where you live. Hong Kong dollars can be used only in Hong Kong.
But it is not really a problem, as your bank manager quickly points out. What he will do is take the equivalent of $6.5 million from the deposits that you hold with him in US dollars or other currencies, exchange that money for Hong Kong dollars and the gates of the fragrant harbour can still open for you.
So you do it. You arrive in Hong Kong with your money and our government officials line up to thank you because we in Hong Kong, of course, are desperately short of Hong Kong dollars. We have hardly any of them in our own banks and finance companies, only a meagre $2.7 trillion, barely as much as 415,000 immigrants like you could bring in under this scheme.
Unfortunately, there is still a problem. When your bank manager exchanged your holdings in other currencies for the $6.5 million that you brought in, where do you think that he got those Hong Kong dollars? Let us puzzle this out.
Did he perhaps get them from Russia? Hmmm ... seems unlikely does it not? Peru, then? Turkey? They have very high inflation in Turkey and the Turkish lira is not worth much. They could do very well there with a currency that is tied to the US dollar and is not worth a hundred times less now than it was 10 years ago. Do you think that your bank manager got the money from Turkey?
No, the light dawns. He got it from Hong Kong.
Let us follow the flow of that $6.5 million. First, a bank in Hong Kong took the money out of its own assets, sent it to your bank manager, he turned it over to you and you then brought it back to Hong Kong, possibly to the same bank from which it came in the first place.
In fact, no money actually moved at all. The only thing that moved was a series of telecommunications signals and the final one from one bank in Hong Kong to another in Hong Kong was not even made if you placed the money in the bank from which it originally came.
The arithmetic is simple. First, you get a minus 6.5 in Hong Kong, the part of the equation almost everyone ignores, and then you get a plus 6.5 in Hong Kong, the part of the equation our government applauds. Add them up and you get a nice round zero. There was no net gain of investment in Hong Kong at all. None, zilch, zip, nada.
All that happened was that $6.5 million worth of Hong Kong dollar-denominated financial assets changed ownership from one hand to another. On the balance of payments, it was recorded as an outflow of $6.5 million in the others category of the capital account with a matching inflow in the same category.
The only people who gained from the transaction are the bankers who handled it because they, of course, charged you a fee to do it.
But let us be grateful that this particular form of fireworks, so highly regarded by our government, is all flash and no bang. What would we do with the money if it were not? For every $100 that our licensed banks hold in deposits at the moment they can find borrowers for only $79.
Our government has got it wrong in two crucial ways. In the first place, this investor immigration scheme does not bring us any net increase in investment and in the second place, we would not need the money if it did. The Hong Kong economy is already flush with cash. Our problem is how to use it, not how to get it.
No, I do not want to spend my days in a classroom but I know who should.
