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Jake's View
PUBLISHED : Tuesday, 05 March, 2013, 12:00am
UPDATED : Tuesday, 05 March, 2013, 5:06am

Excessive caution leaves reserves going to waste

Put that HK$1.6 trillion in savings to real work rather than squander it on needless projects


Jake van der Kamp is a native of the Netherlands, a Canadian citizen, and a longtime Hong Kong resident. He started as a South China Morning Post business reporter in 1978, soon made a career change to investment analyst and returned to the newspaper in 1998 as a financial columnist.

There has been much talk about what the appropriate level of reserves should be. I don't think we need a complicated formula. A common sense rule of thumb says an amount equivalent to 12 months' recurrent expenditure is a prudent minimum, while 24 months would be excessively cautious.

Mike Rowse, 
Insight page, March 4


Needless to say, our excessively cautious financial secretary does not agree. One of the reasons he cited in his budget speech for not touching the reserves is that in 2004 they dipped to only 13 months' worth of expenditure. Oh, the horror.

But you can never trust John Whiskers with numbers. He made the comparison against total expenditure, capital as well as operating. For these sorts of exercises, it is generally considered best to look only at operating expenditure, as Mike Rowse did. We are now at about 17 months' worth of expenditure for that annus horribilis in 2004.

In his miser's campaign to let no one touch his fiscal savings, our scrooge of a financial secretary pretends they consist only of government deposits with the Exchange Fund.

He entirely ignores the investment profits the fund has accumulated, although every cent of these is a public asset. He also ignores the fund's holdings of deposits by other statutory bodies, again 100 per cent government-owned. Together, they amount to more than those government deposits.

Treat them all as one, as they should be treated, and at the worst in 2004, our savings stood at about 40 months' worth of operating expenditure.

Things have improved mightily since then. Our attributable savings - government plus statutory body deposits plus profits - now amount to just under HK$1.6 trillion, the equivalent of HK$670,000 for each and every household in this city.

Say it: wow!

Our government expenditure has also shot up way past its target range recently, of course, but even so, we have savings at present of about 58 months' worth of operating expenditure.

And nothing says that we have only our savings as a cushion for government expenditure. If need be, we can borrow money. Our credit rating is excellent. The United States federal government, for instance, carries a debt of US$16 trillion, equivalent to 55 months' worth of total government expenditure, and we don't decry the financial position of the US. We think it so strong, in fact, that we keep our currency hitched to the US dollar.

If we were ready to incur proportionately only half as big a debt load, we would have access to 84 months' worth of recurrent government expenditure. Our government could run for seven years at current rates of expenditure without collecting a cent of revenues.

So how much do we really need in reserves?

The International Monetary Fund conducted a study on just this question several years ago and said we needed the equivalent of between 30 per cent and 50 per cent of gross domestic product, less if we took certain steps to smooth out government drawdown from the fund. We took these steps.

As the chart shows, the figure has never dipped below 50 per cent of GDP over the last 10 years and currently stands at 70 per cent of GDP.

I'm of Mike Rowse's view. Let's use the money for something like a universal pension fund. All that we do by keeping it stashed away is tempt thieves to enter public service and squander it on needless infrastructure projects that reward them with yummy contracts.




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This article is now closed to comments

John Adams
So what to do if John Tsang and his top staff cannot read / understand the commonsense things that Jake , Mike , David Webb ( and many others ) have written openly ?
Do we have an idiot for a FS or an ostrich with its head in the sand ?
Either way, we need a humane way to put Tsang down ( lethal injection?) and rescue HK from our misery.
Honestly , Tsang will surely go down in history as THE worst FS we ever had ( not to mention the most stupid.
The surplus over the planned government budget for the last fiscal year and most likely from the past too was from land sales and stamp duty. We all think that income for the government is without any repercussions. Hong Kong actually pays dearly for that money. Getting highest bids from land sales only acerbate the shortage of affordable housing. The evidence of poor housing by cage-living and flat-dividing exist against busily building unaffordable flats that adding inventory to the empty speculative flats.
Environmental degradation too is part of what this money has gotten for Hong Kong. More developments are located in already congested areas. More congested area more pollution from traffic. More natural shoreline is lost over reclamations. Or, more disappearances of natural areas in the countryside. The land oriented surplus has a high price tag that everyone in Hong Kong must pay now and ever after.
It is easy to be trapped into argument by the society how the surplus should be spent but lose sight over the consequences of the gain. More, surplus or no surplus budget fighting eludes reforms in housing, education, medical service, social security (retirement fund) and social welfare policies. One-off measure without reforms is irresponsible.
It is more relevant to stop (forbid) the government from scheming from land. Hong Kong must stop such surpluses year after year.
‘Things have improved mightily since then. Our attributable savings - government plus statutory body deposits plus profits - now amount to just under HK$1.6 trillion, the equivalent of HK$670,000 for each and every household in this city.’ Jake gave us his calculation of the amount of money that Hong Kong government is holding. Certainly no judgment can be made how substantiate that trillion is unless we begin to spend it. It may be even insufficient. My idea spending it is for Hong Kong government to return that amount to the people who had paid into it -- mostly from people who had bought property. I am suggesting to reimburse them but with a higher objective in mind – that of to lower property value but without a crash. More to the point is that for Hong Kong to save itself safely by liberating from being the property slave. So that Hong Kong is a affordable place to live and work. Or visit. Can HK$1.6 trillion and whatever leverage it can muster do? Jake, please at least give me or us a clue. I believe in waste not, want not and live happily ever after.
It is quite obvious the Finance Secretary John Tsang has lost his accountability and insight into the real issues concerning the life of ordinary Hong Kong citizens judging from what he ought to have done and not done as Finance Secretary over the years. We can keep whining, but if nothing is being done to rectify the issues, nothing is going to change.


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