Donald Tsang

Why not just dump the whole capital investment scheme?

PUBLISHED : Thursday, 14 October, 2010, 12:00am
UPDATED : Thursday, 14 October, 2010, 12:00am

The government has reviewed the Capital Investment Entrant Scheme, and noted an upward trend in real estate investment, which accounted for 42 per cent of the total investment under the scheme for the first nine months of this year. Despite the fact that real estate investments under the scheme in recent years have only represented about 1 per cent of the total market turnover, the government, in view of public concern, has decided to temporarily remove real estate from the investment asset classes under the scheme.

Donald Tsang Yam-kuen

Policy address

But why not scrap the entire scheme? It does not do what it is meant to do, and never did, but it does put the wrong sort of pressure on the Hong Kong dollar and contributes to driving up property prices through more than just direct purchase.

The original idea was that the scheme would attract needed foreign investment to Hong Kong, HK$6.5 million from each foreigner (read Chinese national with a foreign passport) who wants a Hong Kong ID card, and it has indeed brought in almost 8,000 people who have brought almost HK$55 billion with them.

The immediate fallacy, however, is that we don't need foreign investment. We already have a surfeit of it. We are in fact one of the world's biggest net providers of foreign investment. This is a classic case of bringing coals to Newcastle.

That is to say it would be a classic case if the scheme did indeed bring in these coals. But it does not. What mostly happens instead is that the heaven-seeking aspirant gets a loan of HK$6.5 million from his bank. The bank just takes the money from one Hong Kong account and puts it in another.

The same thing happens even if our man does not borrow the money but instead brings in foreign currency. The bank just takes his foreign currency, which it sends back abroad, and gives him Hong Kong dollars in exchange. It is still just a transfer of Hong Kong dollars from one account in Hong Kong to another.

The point is that such transactions, contrary to popular belief, do not bring in new money. No fresh investment is created, none at all. It is all just smoke and mirrors to fool bureaucrats who do not understand how money works.

But it does create net buying demand for Hong Kong dollars and the result of this upwards pressure, as the first chart shows, is that our currency has frequently been pushed to its HK$7.75 intervention level against the US dollar. It is rubbing shoulders with it again.

Intervention means that the Hong Kong Monetary Authority has to find the Hong Kong dollars the market wants. To get this money, it issues bills and notes to commercial banks. The second chart shows you how much of this it has had to do over the past two years to keep the peg to the US dollar intact.

So here is the first big question. Do we really need this sort of pressure on our financial system? Why make it worse with the capital investment entrant scheme?

And then we get what this scheme does to the property market. By pushing the buy side of the Hong Kong dollar and making the HKMA flood the system with money, it contributes to pushing down interest rates.

Now, contrary again to popular belief, it is not primarily shifty-eyed speculators, evil developers and greedy landlords who are driving up property prices.

The primary driving force is actually those very low, those overly low, interest rates. Push down the investment cost of holding property and you push up the price of property, same thing round the whole world.

So here is my second question and it is pretty much the same as the first. Do we really need this sort of pressure on our property market? Why make it worse with the capital investment entrant scheme?

Removing property from the permissible investment classes of the scheme is purely a token gesture, and Donald as much as admitted it with that remark about it being only 1 per cent of the market.

Why not scrap the entire scheme instead then, Sir?