What is behind Hong Kong’s mind-boggling investment figure?

PUBLISHED : Wednesday, 18 November, 2015, 7:00pm
UPDATED : Tuesday, 12 January, 2016, 3:30pm

Hong Kong should make good use of its competitive edge on bringing in capital and on management know-how to offer a one-stop shop service in the mainland’s go-global strategy, according to Beijing.

The call comes as the volume of the nation’s outbound direct investment (ODI) into the city grew by more than 18 per cent in the first 10 months of the year.

SCMP, November 18

That was our top front page story yesterday but there is a good deal more here than first meets the eye in this gloss of the facts.

The chart hints at the real story. In the three months to June this year, the latest period for which figures are available, there was a net direct investment inflow to Hong Kong HK$560 billion.

Let me put it into perspective. This was the equivalent of 99 per cent of gross domestic product over those three months. Our net direct investment inflows, net of any outflows and excluding all portfolio, derivative and other investments, was only a sliver less than the total value of all the goods and services we produced in the second quarter.

Which boggles the mind if it really happened.

Which, of course, it did not.

What happened, and has long been happening, is that big mainland investors launder their money by passing it through Hong Kong on its way in and out of the mainland so that they can pretend it is foreign investment. We connive at this because we are all in favour of money laundering.

READ MORE: Rule of law suffers when Hong Kong targets money laundering

That is to say, we are in favour of it if done in large amounts. If done in small amounts, we send the people who do it to jail for up to 10 years, thus proving that we are also tough on money laundering. This is called justice. You figure it out. I can’t.

Normally the big flows balance each other. What comes in goes back out and our statisticians keep up the pretence that Hong Kong entities are responsible for it all.

On this occasion, however, not only did the inflows run at their usual hundreds of billions of dollars a quarter, but the outflows backed up and also turned to inflows. You might say something got stuck in the U-bend.

The analogy holds. Previous investments in the mainland made through Hong Kong were sold off and the money came back.

There is nothing truly surprising here. The mainland’s own balance of payments figures show a net capital outflow running by my calculations at some US$600 billion a year at present. The money wants out of the mainland so badly that it has backed up coming back through Hong Kong.

It will not stay here, of course and where it will go I do not know. I do know, however, where it will not go. This is private flight capital. It will not go to Beijing’s “One Belt, One Road” ambitions. It wants a return in kind and its kind is not political fluff.

In fact, in yesterday’s newspaper, under the heading “Chinese investment in Africa down 40pc in first half”, we had separate confirmation that the “One Road” element is already faltering.

READ MORE: Hong Kong’s anti-money-laundering laws make a mockery out of justice

Several lame explanations were offered for this trend but the real reason is that things have changed. Beijing is furiously pulling money back in from its foreign reserves at the moment to compensate for outwards private capital flight. It is still happy to give Africa plenty of talk but money is another thing just now.

And as to Hong Kong making “good use of its competitive edge ... to offer a one-stop shop service in the mainland’s go-global strategy,” well, personally I favour Cinderella as a good story.

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