Lock up Hong Kong future fund for at least 10 years, government advisers say

The "future fund" should be locked up as an investment for at least 10 years and withdrawn only when the fiscal reserves drop to a level equivalent to six months of gross government expenditure, according to details unveiled by government advisers.

Even if the money was withdrawn, it should be used only for "absolutely essential" expenditure items, the working group on long-term fiscal planning said in its second report submitted to Financial Secretary John Tsang Chun-wah, which was released to the public yesterday.

"Whether these items are technically classified as capital, recurrent or one-off might not be material - provided they are all badly needed," the report said, adding that debt financing and securitisation of government assets should be exhausted before any withdrawal was made.

The fund will be set up this year to cope with structural deficits likely to emerge within a decade amid an ageing population and a shrinking workforce.

It will consist of HK$220 billion from the existing land fund and a quarter to one-third of future government budget surpluses. Tsang announced in his budget that the fund would be managed by the Hong Kong Monetary Authority.

The withdrawal criterion of six months of gross government expenditure is based on a general observation that the government usually faces a cash flow shortfall of three to four months during a single year. The advisers then added a buffer of two months of expenditure to cope with any additional welfare expenditure needed during an economic downturn.

The working group did not give a specific purpose for the fund nor set an investment return target. But group member Professor Liu Pak-wai said the Monetary Authority would have a strong incentive to get the best return. "The fund will get what the authority will get … Asking your fund manager to invest in the same portfolio is the safest approach," he said.

The group suggested that about half of the fund should be invested, in phases, in the authority's long-term growth portfolio, which was set up in 2008. The authority should also consult the financial secretary once a year on the investment strategy.

The portfolio, valued at HK$115.2 billion at the end of last year, is invested in global private equity and real estate. It comprises 3.6 per cent of total Exchange Fund assets and yielded an annualised return rate of 13.5 per cent by the end of last year, much higher than the 2 per cent return from the authority's general investment portfolio.

The future fund is estimated to reach the equivalent of six to eight months of government expenditure if its annualised return rate reaches 5 to 8 per cent and the government spends at its current pace.

Unlike Singapore's Temasek, which is managed by a statutory body, the future fund will remain part of the fiscal reserves. It means the government does not have to seek lawmakers' approval to create the fund.

Lawmaker Christopher Cheung Wah-fung, who represents the finance sector, urged the government to report fund performance to legislators every year. He also hoped the fund could be used for meaningful projects like a better pension scheme and health care services.