The gaping hole in HK's blanket deposit guarantee

PUBLISHED : Thursday, 13 November, 2008, 12:00am
UPDATED : Thursday, 13 November, 2008, 12:00am

If you think your Hong Kong bank deposits are fully guaranteed under the blanket deposit protection scheme announced last month by Financial Secretary John Tsang Chun-wah, you may want to think again - especially if you are unfortunate enough to run a small business.

It turns out that Hong Kong's full deposit protection is not as comprehensive as it seems.

Last month, with faith in the worldwide financial system crumbling, the Hong Kong government moved to restore trust in local banks by announcing it would 'guarantee the repayment of all customer deposits' held in the city.

Rattled by September's run on the Bank of East Asia and unnerved that the scheme had previously covered only combined deposits of up to HK$100,000 at each bank, ordinary account-holders heaved a huge sigh of relief.

Instead of withdrawing their money and stuffing it under the mattress or shifting it to jurisdictions offering better protection, depositors took heart and decided to leave their hard-earned cash where it was - in their local bank accounts.

However, a close look at the small print governing the Hong Kong Deposit Protection Board would have dented the confidence of many account-holders all over again.

Although the step announced last month appeared generous, guaranteeing all Hong Kong dollar and foreign currency deposits held in the territory both by individuals and companies, the terms of the deposit protection board specifically exclude something called 'secured deposits' from the scheme's coverage.

What that means is that, if customers have agreed to lodge money held in deposit accounts as security against an overdraft, loan, or credit line - no matter how small - then those deposits - no matter how big - have zero protection.

There are any number of reasons why a customer might agree to use his or her deposits as collateral in this way.

He might, for example, offer money held in his yuan deposit account as security against a Hong Kong dollar loan to save the bother and expense of currency conversion. Or she might agree to place cash in her savings account as collateral for margin trading on the stock exchange.

Or he might lodge part of a five-year time deposit, which he cannot otherwise access, as security against a temporary overdraft facility for his current account.

What the customer may not realise, however, is that if he does any of these, under Hong Kong's banking ordinance he forfeits all protection on those deposit accounts should the bank where they are held subsequently fail.

Even worse, the simple act of agreeing to collateralise a credit line with a deposit is enough to lose all protection - even if that credit line is never drawn down.

So, for example, if a customer consents to secure a HK$5,000 precautionary overdraft with money held in his HK$1 million time deposit, he will lose the entire HK$1 million should the bank go bust, even if he has never actually gone overdrawn.

If any Hong Kong banks do collapse, this loophole is likely to punish directors of small businesses especially harshly.

As Hong Kong banks have sought to reduce their credit exposure to small companies in recent weeks, many businesses have found themselves required to lodge extra collateral against existing credit lines.

In some cases, banks have demanded that company directors place their personal bank accounts as security.

What - at least in some cases - the banks have not told them, however, is that if they agree to bank demands and offer their own savings as collateral, they will forfeit the right to any protection under the government's blanket deposit guarantee.

Small businesspeople in Hong Kong are facing a hard enough time as it is, without the risk of suddenly discovering they have lost personal savings they thought were fully guaranteed should their bank collapse.

It looks like being a gloomy Christmas for Europeans this year. According to sources, on Saturday the European Union will announce punitive anti-dumping duties on imports of Chinese candles.

According to draft regulations seen by Monitor, the EU will slap penalties of up to Euro671.41 (HK$6,517) per tonne of paraffin wax content on candles from China.

Based on current European import prices, that implies a duty of up to 40 per cent on the 200,000 tonnes a year trade.

The penalties are being imposed in response to a complaint filed by European candle makers, which allege their Chinese competitors enjoy an unfair advantage by being able to buy paraffin wax below international rates.

The EU case looks shaky. At the moment, there appears little to choose between domestic Chinese and international paraffin wax prices.

And if international prices have been higher in the past, there may be a simple explanation. Last month, the same EU hit nine international paraffin wax producers with Euro676 million in fines for operating a price-fixing cartel.

Such unseasonal hypocrisy beggars belief.