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Our investor immigration scheme is based on complete fallacies

'One successful applicant under the government's investor immigration scheme saw the HK$6.5 million minimum investment increase to HK$44 million in a year after putting it on a single stock, the Immigration Department said yesterday.'

SCMP, February 9

OTHER PLACES SEEK to attract doctors or nuclear physicists but in Hong Kong we have landed a big one when we pull in a punter who gets lucky after placing his entire stake on one number on the roulette wheel.

It may not actually be luck, of course. My guess is that this fellow held a Belize passport to evade the Capital Investment Entrant Scheme's restriction against Chinese nationals. He then bought his own H share despite agreeing with his mates that they would all keep their hands off the Hong Kong stock for the first few weeks of the listing. Who knows? He may try to cheat on them again and this time lose big, whereupon he will jump somewhere else, leaving his wife and kids to be fed, clothed, housed, doctored and educated at our expense. Ladies and gentlemen, may I introduce you to an alternative interpretation of what the Immigration Department calls 'a successful applicant'.

But let's put the entire Capital Investment Entrant Scheme into perspective. The idea is that we encourage investment inflows by giving a Hong Kong ID card to any foreigner who wants to live here and will bring in HK$6.5 million. There have been 978 successful applicants since the scheme was started in late 2003.

It was a silly idea from the start because it is based on two completely false premises, the first of them being the notion that our economy needs foreign investment to thrive. The exact opposite is true. Other economies need our money. We don't need theirs. We are rolling in money with big fiscal and current account surpluses and record excess liquidity in the banking system. Our net assets abroad are already more than twice the size of our economy. We are the bankers in the fancy office, not the beggars on the street below.

It's all a mystery, however, to the civil servants who cannot tell a capital investment from a cap and vest (with mint) and who see no difference between Hong Kong and Harare.

The other big misunderstanding here is the assumption that the successful applicant actually enriches the Hong Kong economy by HK$6.5 million. This is a complete fiction. Just follow the steps of what actually happens here. Our applicant does not actually have HK$6.5 million. He has assets worth that much and he may even have that much in cash but he does not have any of it in Hong Kong dollar form. He lives outside Hong Kong and the money is in another currency.

To get his HK$6.5 million stake he thus goes to his bank and arranges to exchange his foreign currency for Hong Kong dollars. His bank then contacts its Hong Kong branch and the deal is done. Where the Hong Kong branch used to have HK$6.5 million in Hong Kong dollar cash and no foreign currency holdings on its books, it now has HK$6.5 million worth of foreign currency while our man holds its HK$6.5 million in Hong Kong dollar cash. Our man can now invest this money in Hong Kong and apply for an ID card.

Now ignore how simplistic this explanation is and focus on what really counts here - no new money actually entered Hong Kong! All that happened is that money was debited from one account and credited to another within the Hong Kong financial system. You can make it more complicated than I have done here but, no matter how complicated you make the transaction, the same simple counter-intuitive truth crops up every time - no new money entered Hong Kong. There was only a shuffle on the books of a bank. The net gain in investment in Hong Kong was nil.

In fact, the only effect this transaction had on the Hong Kong economy was to exert a very slight upward pressure on the exchange rate of the Hong Kong dollar. The transaction was initiated by a bidder for Hong Kong dollars rather than a seller of them.

But the Hong Kong dollar has generally been strong against its peg since the capital investment entrant scheme was started, stronger on many occasions than our monetary authorities would like. To that extent, the scheme has actually been counter-productive.

I suppose I can't really expect civil servants to understand all of this. They tend to be set in their ways and their ways do not feature much understanding of how money flows.

Nonetheless, I think they should be told. This scheme, fellows, is based on several complete fallacies about the workings of an economy. You people are way out of your depths. Go back to things you understand and wind down this nonsense.