Jake's View

Hong Kong goes with the flow and reaps the rewards of capital movements

Head scratching in HKMA can make way for reality of mainland-bound capital movements

PUBLISHED : Tuesday, 29 July, 2014, 1:04am
UPDATED : Tuesday, 29 July, 2014, 1:04am

Hong Kong must stay alert to the possibility of large capital outflows even as its currency has had unusual strength recently due to inflows for acquisitions, share dividends and related transactions, an official of the Hong Kong Monetary Authority said.

SCMP, July 28

They are all turning preachy in government these days. If you are a big noise in the bureaucracy your thing increasingly is to publish a blog on your department's website.

The latest from the HKMA is deputy chief executive Peter Pang Sing-tong, telling us in earnest well-meaning tones that water is wet, the sky is blue and therefore "the public should be prudent when borrowing and investing". Thank you, Peter, for another big addition to the sum of human knowledge.

But the HKMA does have a problem. The instruction manual for the peg to the US dollar says that interest rates will fall to near zero when there is a big inflow of money into Hong Kong. No one will then want to bring in Hong Kong dollars any longer and the inflows will turn to outflows.

Unfortunately, it isn't working that way just now. Interest rates are already at rock bottom but still the inflows keep coming and once again the HKMA has had to jump into the market to stop the exchange rate against the US dollar from going stronger than HK$7.75.

In Hong Kong you will never work out why, how and where the money goes

You get the impression here that the good Peter is now quite sure of why it is happening. He has a long list of reasons including big dividend payments, cross-border deal activity and the coming launch of the Shanghai through train. Yet you can almost see him scratching his head.

Time for some education. The blue line at the top of the chart represents capital flows of all forms (direct investment, portfolio and other) from all foreign sources into Hong Kong as a percentage of our gross domestic product.

Now look at the scaling numbers. In 2007 and again in 2011 this amounted, for a period, to more than the entire output of our economy. For the 12 months to March this year it amounted to an average of 91.6 per cent of GDP.

It is conceivably possible that this could happen but it certainly looks odd. Why should a wealthy economy that prides itself on its self-reliance be so reliant on foreign investment?

Let us add to the confusion. The red line swinging along the bottom of the chart represents capital flows of all forms from Hong Kong to foreign destinations. This says that in 2007 and 2011 we pumped more than the entire output of our economy into foreign destinations.

And now let us resolve the confusion. You will notice that the two lines are mirror images of each other. What has happened here, quite obviously, is that we have taken money in, pretending that it is meant for Hong Kong, and pumped it out again as foreign investment from Hong Kong into the mainland.

It's just a false declaration trick, a neat way of making mainland savings and export proceeds get preferential treatment as foreign investment.

To shows you how things would more normally stand, the lines running near the zero axis on the chart represent Thailand's capital inflows and outflows as a percentage of GDP. Even these are probably inflated by false declarations for Cambodia, Laos and Myanmar.

So, yes, Peter, scratch your head indeed. In a place like Hong Kong you will never work out just why, how and where the money goes. What you are officially told cannot be the truth.

That is the cost of being a world financial centre. The reward is being one of the richest cities in the world.