Hold the feel-good stuff, I'd rather the HK$97b of taxpayers' money

PUBLISHED : Sunday, 17 October, 2010, 12:00am
UPDATED : Sunday, 17 October, 2010, 12:00am

In response to the global financial crisis, the government rolled out a series of measures to stabilise the financial system, support enterprises and preserve employment to help small and [medium-sized] enterprises tide over the difficult times. Over the past year, 39,000 applications have been approved under loan guarantee schemes, involving total loans of over HK$97 billion. The measures have benefited some 20,000 enterprises and helped preserve more than 330,000 jobs.

Donald Tsang Yam-kuen

Policy address, 2010

That's actually a very big figure - HK$97 billion - all spent and gone in the space of what is actually less than a year. Even that wastrel railway to the border is budgeted to absorb only two-thirds as much and it certainly won't do this over the space of just one year.

Spent and gone, I say, and if you want to quibble with the 'gone', well, I'll grant you that a good proportion of the money will be repaid, perhaps even most of it, but I think the word 'gone' is still a good starting point.

Let's quibble. The government has an ordinary SME scheme that guarantees 50 per cent of loans up to HK$6 million for equipment and working capital. The Trade and Industry Department has made the statistics here unintelligible but I gather that about HK$10 billion of loans was made under this scheme over the last year.

What Donald was actually talking about, however, was a special loan guarantee scheme offering 80 per cent guarantees of loans up to HK$12 million for 'general business needs to tide over the liquidity problem during the global financial crisis'.

Thus not only was almost 10 times as much money advanced under the special scheme as under the ordinary scheme, but the guarantee limit is more than three times as great for each loan and the criteria for lending as good as specifies that the borrowers must be in financial trouble.

Yes, that's our money, yours and mine, at risk here.

Things get even worse, however. It is not government officials who assess the loan applications for merit. This job falls to what are called participating lending institutions, 47 locally licensed banks, most of them small ones. Who is Banco de Oro Unibank, for instance, or Intesa Sanpaolo? Lots of Hong Kong history and affiliation here, I'm sure.

Now imagine yourself a credit officer of one these small banks. You have a dubious small company on your loan books and your name is stuck to the credit approval. Along comes our government and says it will guarantee 80 per cent of loans to companies in liquidity troubles (all financial troubles are easily defined as liquidity troubles).

Do you or do you not now go to this duff borrower and suggest that he replace your loan to him with a new government guaranteed loan?

No, no, you would never do that. Get thee behind me, Satan. The bureaucrats in the trade and industry department have relied on you to make a competent and honest assessment of the credit risk and you would never betray their trust, never.

And that's why I use the word 'gone' to describe these guaranteed loans.

But, OK, let's ignore this and remember that Donald did not talk about repayment. He rather prided himself on this scheme because it 'benefited some 20,000 enterprises and helped preserve more than 330,000 jobs'.

Wonderful, Sir, but what if some of these enterprises should not really be in business? How many Hello Kitty-style retailers of plastic kitsch for otherwise empty bookshelves does the ancillary services block of a public housing estate really need? Isn't it a mercy sometimes to allow the failure of enterprises that cannot survive anyway?

This is what 'difficult times', otherwise known as recessions, do. They clear out the dead wood of commercial failures, refocus economic direction, pull back resources that had been allocated to bad ideas and set the stage for the next boom.

Perhaps some of the failed ventures could actually have survived the recession, but always far fewer than the backers of those ventures claim. The following boom will in any case resurrect them if they are truly viable.

What all of this says, Donald, is that it is probably a bad idea to interfere in the natural workings of an economy with loan guarantee schemes of this kind. They actually impede rather than encourage commerce. You may think you have helped save 20,000 enterprises but you may have hindered 30,000 from forming.

Equally, you may think you have helped preserve 330,000 jobs but you may have hindered 500,000 from being created. Jobs are created whenever people spend money and the best way of creating the most jobs is to see that money is spent on what most people want, what they want most, at the lowest possible cost to them.

I see HK$97 billion spent blindly, aimlessly, badly.