Making sense of the nonsense of investment inflow numbers

PUBLISHED : Friday, 19 October, 2007, 12:00am
UPDATED : Friday, 19 October, 2007, 12:00am

'Once again this United Nations report confirms Hong Kong's position as a highly attractive market for foreign direct investment. To be second in Asia and seventh in the world is an impressive feat for a city economy of seven million people.'

Mike Rowse,

The 'DG'

And blah-blah-blah right through another media conference as if he didn't know perfectly well that it's actually all nonsense.

But the DG (Director-General), as his underlings at InvestHK address him, does know it and he let it slip with one short remark that he can later use to cover himself - 'Equally, the report shows that Hong Kong continues to act as a two-way springboard for overseas companies and capital into mainland China.'

The background here is that the United Nations Conference on Trade and Development has published a study showing that foreign direct investment (FDI) inflows to Hong Kong amounted to US$42.89 billion last year, which is the second-greatest amount in Asia after the mainland and seventh-greatest in the world.

Not bad, eh? Call together the media now. Hong Kong scores another big one.

The table below sets out the facts of the matter. My numbers, taken from the official statistics agencies of each country covered, are slightly different from Unctad's but no matter.

The first column on the left confirms the bald outline of the story. Hong Kong attracted the second-largest FDI inflows in Asia after the mainland last year.

Now let's unravel the story. The second column should start to make you scratch your head. Those FDI inflows to Hong Kong amounted to a thumping 22.8 per cent of our gross domestic product, hugely above the ratios for every other economy in Asia except Singapore's.

Just ask yourself the question. What could that money possibly have gone into if it stayed here, as the definitions say it must have done if we classify it as FDI inflow? Who in Hong Kong needs to go to foreigners for such enormous sums of investment capital when we are rolling in money at home? It doesn't make sense.

Indeed it doesn't and the third column gives you the clue to this mystery. FDI inflow is one side of the picture. The other side is FDI outflow and last year FDI outflows from Hong Kong amounted to US$61.6 billion, far more than the inflows.

The fourth column gives you the full perspective on this. Those FDI outflows were the equivalent of 32.5 per cent of GDP. No other economy in Asia comes even close to this ratio.

Finally, let's balance things out. What really counts in FDI is net FDI inflow - what comes in less what goes out. We have the biggest net FDI outflow in Asia, both in straight dollar value and as a percentage of GDP.

The mainland has the biggest net inflow in dollar terms and Singapore has the biggest net inflow as a percentage of GDP, which shouldn't really be surprising. Singaporeans desperately need constant foreign investment. They are bureaucrats who like to pretend they are entrepreneurs. This costs money, which they don't have, but they're very good at talking others into giving it to them.

Thus the story on FDI for Hong Kong is the exact opposite of what the InvestHK DG was trying to tell us. Except that he gave the game away talking about a springboard into the mainland.

It is, of course, the obvious explanation. The money comes into Hong Kong and goes directly back out again to the mainland, plus a good deal more that originated in Hong Kong.

You might think it would be simpler to funnel this money directly into the mainland instead of passing it through Hong Kong first. However, for various reasons involving the mainland's closed capital account and its tax laws, putting it through Hong Kong first is the safer, cheaper way.

It means that the people who bring it in have to misrepresent this inflow to our official statisticians as FDI inflow to Hong Kong alone, but who cares about making the statistics unreliable as long as the money is secure?

And as long as our statisticians continue to insist, as they do, that this must really be FDI inflow to Hong Kong alone because the declarations state that it is, Mr Rowse has the additional joy of being able to stand up at media conferences and crow that these gargantuan FDI inflows show how important InvestHK must be to Hong Kong.

But come off it, Mike. It's utter nonsense and you know it is.


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