The finance sector loves to make things seem more complicated than they really are. Governments of all persuasions like to hide behind the myth that issues are too complex for ordinary people to understand. Add those two tendencies together and one can fathom why the Hong Kong Monetary Authority is so little scrutinised. But it needs to be as there is a distinct danger that it is starting to behave less like a purely monetary body and banking regulator and more like a Singapore-style government fund, a politically driven state with a state.
A media colleague otherwise well-informed about the government system recently admitted she had no idea about the workings of the Exchange Fund and why we should take note of it. She was amazed to hear that it had almost HK$600 billion in assets which belong entirely to the community at large, a sum in addition to the fiscal reserves which will very soon hit HK$500 billion. 'Please explain how we have all this money,' she asked.
The Exchange Fund balance sheet is actually quite simple to understand, so hopefully legislators, the media and others will take note of this gigantic surplus and force the government to transfer some of it to where it belongs - on its own books.
As it is, the government's cash balance sheet in the budget is a dishonest fiction that hides its total assets. The Fund had, at the end of January, total assets and liabilities of HK$1.45 trillion. Of the liabilities, HK$186 billion represents deposits made by banks and the government itself as backing for the note and coin issues. Some HK$502 billion represents the government's fiscal surplus, HK$175 billion the Exchange Fund's own paper and other liabilities. That leaves an accumulated surplus of HK$585 billion. That's all ours!
The accumulated surplus represents the profits made by the Exchange Fund which have not been passed on to their rightful owner, the government. A more truthful way to present the balance sheet would be to show the fiscal reserves held through the Fund as HK$1 trillion and the Fund's own accumulated surplus as HK$87 billion.
In the last calendar year, the Fund's own surplus at HK$109 billion was even larger than the government's own fiscal surplus, even after deducting the HK$27 billion payment made to the government as earnings on the fiscal reserves.
The Exchange Fund makes money in several ways. It earns interest on the cash backing for the note issue, a legitimate source of revenue for any central bank. But it only pays the government a return on the fiscal reserves, not on its own surplus which has been boosted not only by interest and dividends received from its investments, but also on the foreign exchange profits it makes whenever the HK dollar declines against the currencies (other than the US dollar) in which it holds assets. In short, the public purse does not reap the benefit of a weak currency but has to bear the brunt of inflation caused by it.