Monetary Authority boss Joseph Yam Chi-kwong must have been quietly amused by legislators' demands that he take a pay cut due to the recent poor returns from the exchange fund. If he is to be paid on the same basis as a hedge fund manager then he could credibly argue for a performance bonus when markets improve.
Unfortunately, such flawed logic keeps debate at a level that obscures the real issues. Mr Yam cannot be blamed for this year's fall in the Hang Seng Index which wiped $37 billion off the fund's equity holdings. Equally, he can hardly claim credit for the dramatic rebound in long-dated US treasury bonds that is likely to have perked up recent performance. The authority is transparent in its financial reporting and cannot be expected to reveal detailed trading positions lest it weaken its hand when dealing in international markets.
Mr Yam's bigger problem is managing market expectations when the SAR's reserves are being whittled away due to systemic fiscal deficits.
A currency board requires the monetary base to be backed with liquid foreign assets; excluding the fiscal reserves, the SAR easily measures up with 2.7 times coverage. The only question then is whether the SAR has the stomach to stay with the deflationary medicine of its currency system, not - as in Argentina's case - whether it will run out of money.
If annual deficits become a permanent feature then the SAR will run down its reserves and become a net borrower. The peg would then be threatened and Mr Yam would really have problems. That is the issue that Financial Secretary Antony Leung Kam-chung must face when considering much-needed tax reform.
If he does not do so, Mr Yam will receive a lot more calls from the Treasury to sell off Exchange Fund assets to fund government spending. This harsh reality must be faced, rather than calling on Mr Yam to punt our way out of fiscal trouble.
