Time to rein in HKMA's excesses
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.
At times the authorities claim that the Exchange Fund size is necessary to protect the dollar peg. This is nonsense as the peg is supposed to be protected by a combination of the foreign currency backing for the note issue and interest rates, not by a fund which even with HK$1 trillion in foreign assets is less than a third of Hong Kong dollar deposits. Even backing for the whole monetary base would need only about HK$331 billion in foreign assets, not the HK$1.26 trillion on the Fund's balance sheet.
At a time when, despite its official surpluses, the government is crying poverty and threatening to reduce health-care availability (other than for its own employees) the HKMA's position needs a close watch as it has not only been accumulating assets in its own name (and not the public's), but engaging in empire-building in several directions.
There was the recent revelation that it had bought a major stake in Hong Kong Exchanges and Clearing. Why? Does it have pretensions of becoming some sort of Sovereign Wealth Fund like Singapore's Temasek Holdings, the fiefdom of the prime minister's wife? One may ask why it holds equities at all given its purely monetary and reserve role.
Then there is that relatively new creation, the Deposit Protection Board, which is effectively under the thumb of the HKMA, which in turn determines the premiums that banks must pay to it according to an undisclosed ratings formula. It does a good but totally unnecessary job of guaranteeing bank deposits - but only up to HK$100,000 per depositor per bank. Thus it only covers about HK$500 billion out of total deposits in the banking system of HK$6 trillion. The HKMA, responsible for banking supervision, could easily take this level of risk on to its own books rather than set up a ponderous bureaucratic mechanism costing HK$30 million or more a year. Meanwhile, the insurance premium provides banks with another excuse for keeping savings deposit rates at derisory levels.
Then there is the Hong Kong Mortgage Corporation, another HKMA offshoot and an unnecessary public sector construct in a city overflowing with private sector financial institutions. It has assets of HK$46 billion and is growing fast thanks to access to ultra-cheap funds by virtue of its ownership. It was never needed and was one of the many devices introduced by the government more to help property developers and re-inflate land prices than promote home ownership. It should be closed down, but instead it is expanding overseas, thanks to profits easily earned due to its government status.
Under Joseph Yam Chi-kwong, the HKMA has been competently run by a man who understands his brief and is too arrogant to have become a political pawn. But he is being pushed out next year so there is every reason to fear the next incumbent will be a Tsang loyalist who will use the institution and its huge resources as a slush fund, beyond the reach of the Legislative Council, for favoured projects and politically inspired investments. So now is the time to cut it down to size, distribute a significant part of its accumulated surplus to the government, and close its small but costly sideshows.
Philip Bowring is a Hong Kong-based journalist and commentator