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Jake Van Der Kamp

'With the reserves now standing at about 22 months of government spending, what do you think is an appropriate level?'
SCMP Survey, February 18
It's a rule in journalism school that the first sentence of anything you write should be short and snappy to pull the reader in. Here is the rule broken. The answers to the question above by percentage of respondents were: nine months - 4 per cent, 12 months - 22 per cent, 18 months - 35 per cent, 24 months - 22 per cent, 30 months - 9 per cent and 'aw, gee whiz, I dunno, lemme think about that' - 9 per cent.
Do a little finger exercise on a calculator and you will find that the 1,000 respondents to the survey think on a weighted average basis that our reserves should equal about 19 months of government spending, which is less than the survey's benchmark figure of 22 months.
But what do 1,000 people chosen at random know about it. This is a question for the experts. What do they think?
Unfortunately, we can't ask our most obvious experts, the Hong Kong Monetary Authority, the managers of the money. What they think is that they like to have as much money under their management as they possibly can.
Ask them and they'll talk about prudence, shaking their heads wisely to suggest to you that we're not prudent enough. That's usually enough, at least with  the Legislative Council, to keep the miser's chest growing. The HKMA, shall we say, is not in a position to give us an arm's length opinion and is not minded to do so anyway.
Thus, let's turn to the real experts, the International Monetary Fund, which dealt with the question in a paper published early last year and concluded - 'Based on historical patterns of volatility, these exercises suggest prudential reserve holding of around 30-50 per cent of gross domestic product.'
Forget the calculator. I have the relevant figures for you. A level of 30 per cent of GDP is the equivalent of 24.9 months of average government expenditure last year and 50 per cent is 41.5 months.
But the IMF had more to say, in particular that the booking of our investment returns was too volatile and smoothing this out 'could reduce reserves required to withstand a string of five deficits by around 7-10 percentage points of GDP and even as much as 20 percentage points over a seven-year horizon'.
We have taken that advice. We now book our investment returns on a six-year average basis. Thus let's incorporate the further reserve reduction as well. We'll call it 10 per cent, meaning we need reserves of only 20 to 40 per cent of GDP. The median point of these two is equivalent to 25 months of government expenditure.
And now we come to the joker in the pack. Question: Is it true that our reserves stand the equivalent of 22 months of government expenditure? Answer: No, it's not. The real figure right now is about 56 months.
Look at the balance sheet of the Exchange Fund, which holds these reserves and which had total assets of HK$1,417 billion at the end of December. Not all of this can  be counted as true free fiscal reserves. Some of it is owed to parties other than the government.
We can break this down from the liabilities statement. The first four items - certificates of indebtedness, coins in circulation, balance of the banking system and Exchange Fund paper, all have to do with backing the cash in your wallet and maintaining the peg to the US dollar. I shall exclude these from our reserves figure.
I shall also exclude 'others' on the excellent grounds that I haven't a clue what it comprises. This leaves us with 'government placements', which is the built-up savings of past fiscal surpluses and 'accumulated surplus' which is our accumulated investment earnings from the exchange fund.
Put these two items together and you get a figure of HK$1,082 billion, which is equivalent to 56 months of government expenditure. That 22 months figure represented only 'government placements'.
It ignored the fact that 'accumulated surplus' is all at the perfectly free disposal of government, too.
So not only are the reserves three times as great as the 1,000 respondents to the survey thought they should be on average, but roughly two times as great as the IMF thinks they should be.
This means, first of all, that we can ignore all of the self-serving miser's talk from the HKMA. There is no reason for a further build up of reserves.  If that's still your line, Joe, then keep it to yourself.
And secondly, it means that we should put a biggish chunk of what we have already saved to worthwhile purposes at home rather than funding American warmongers with the money. That should be your line for your budget, John.



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Hong Kong Monetary Authority (HKMA)

No reason to further build up reserves