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Jake Van Der Kamp

The fiscal reserves placed with the Exchange Fund help reinforce public confidence in the Hong Kong dollar and our monetary stability.
Financial Secretary John Tsang Chun-wah Budget speech, 2011 
Now isn't this just typical in a newspaper columnist. Wait until your man is down and then kick him some more. What budget in recent years has been more vilified than John Tsang's most recent? Yes, and that's when Jake pulls on his boots for another stomp.
Guilty.
 In mitigation I plead that the hoarding mentality of this scurry of squirrels now in control of our public finances will weaken, not strengthen, our economy. There are two immediate good reasons why building up further reserves will do nothing for monetary stability.
The first is that more than 90 per cent of these reserves are held in foreign currency, which means they can only be used to prop up the HK dollar if speculative attack threatens to weaken it. They can do nothing to stop it growing stronger.
But no threat of weakness exists. We are already tied to one of the world's weak currencies, the US dollar, while running a consistent balance of payments surplus with record holdings of foreign reserves, a huge fiscal surplus and with consumer prices still below the levels of 1998.
 These are all things that strengthen a currency. The Hong Kong Monetary Authority's biggest headache is keeping the US dollar peg from being broken on the strong side, not the weak.
The second reason that big reserves won't help us is that speculators see them as a sign of weakness. 
If our authorities, the people who should know, seem so worried about the defences of the currency then perhaps there is good reason to worry. That bellicose lout, Alexander the Great, adopted just this thinking when he destroyed Persian civilisation. He attacked the Persians where they posted their strongest forces on the grounds that it was where they themselves must have thought they were weakest. Invariably it worked.
Defences that rely on big numbers rather than on a government's confidence in its own people rarely stand up to determined assault.
But our HK$1.3 trillion in free fiscal reserves isn't that much anyway in the scale of things. You know that line in Crocodile Dundee where the bad guy pulls a blade on Paul Hogan and says, 'This is a knife', whereupon Hogan hauls out a monster carver and says, 'No, this is a knife.'
A knife in our context is worldwide foreign currency trading of US$3.98 trillion daily. That's about 24 times the size of our reserves and I stress that this is daily trading. Don't try it John. You're still with the midgets.
Here are some more examples of his lax thinking on reserves:  
'The investment income of the fiscal reserves accounted for about one-tenth of government revenue. It is an important source of revenue for us.'
 He squirrels away something like HK$90 billion into reserves out of his revenues and then books back about HK$30 billion in income from these reserves. This is a net gain in revenue?
 'Hong Kong adopts a cash-based accounting system with no provision for our liabilities, such as civil service pensions ... '
 Hong Kong has already for a number of years maintained accrual accounts, the more accurate form of accounting practised by corporations. The accruals accounts for the last fiscal year show a provision of HK$469 billion for civil service pensions. Even after this they show government net assets of HK$1.2 trillion. 
Mr Tsang is an architect by profession.
 'Recently, the credit ratings of Hong Kong have been upgraded to the highest level. This will allow local companies to raise funds at relatively low interest rates.'
 Let's have a count here of how many local companies will benefit from this through debt instrument issuance that they have made on global fixed income markets. One hand will do and you can still curl a few fingers back.
 'Maintaining adequate fiscal reserves does not mean that we are reluctant to increase expenditure.'
 Yes, it does. Mr Tsang expects operating expenditures to rise to HK$317 billion in four years from HK$298 billion in the coming fiscal year. This represents a compound annual growth rate of only 1.6 per cent. Over the same period he expects the nominal value of the economy to grow by an equivalent rate of 7.5 per cent.
But don't be too sure that what he saves by squeezing public services will go into reserves. What isn't lost by HK$100 billion in public guarantees of loans to duff companies will be misspent on giant transport projects for which we have no need. 
And this, throughout history, has been the invariable fate of government cash stashes. A spendthrift sooner or later succeeds the miser and squanders it all.



Hoarding mentality a sign leaders lack confidence in our strength