Hong Kong flush with surplus but government remains unloved

Hong Kong's dilemma is different from that in most other places: it has too much money, rather that not enough.

Scuffles occurred between police and protesters in Hong Kong on Sunday as up to 10,000 people demonstrated over the government's budget.

Hong Kong's dilemma is different from that in most other places: it has too much money, rather than not enough. The city has just announced a HK$71.3 billion (Dh33.62bn) budget surplus for the current fiscal year, after forecasting a HK$25.2bn deficit during last year's budget.

The demonstration followed a U-turn on the budget by John Tsang, the financial secretary, with protesters demanding he use more of a huge surplus to boost retirement protection schemes, public housing and environmental protection. Chanting slogans and waving placards, members of political parties and ordinary citizens marched to government headquarters, accusing the administration of failing to address problems including runaway property prices and a widening wealth gap.

"Shame on you, John Tsang!", "Step down now!", "Say no to a budget without a vision!" they chanted, pumping fists in the air, as a large contingent of police looked on. It is not just the latest budget surplus that has come under criticism. Depending on how one calculates it, the Hong Kong government also has accumulated reserves of about HK$1 to HK$1.2 trillion, most invested overseas.

Hong Kong's reserves amount to about half a million Hong Kong dollars per capita of this city's 6.7 million population, which has been suffering from stagnant wages, rising property prices and creeping inflation.

It is this dichotomy of a government with a large budget surplus and reserves while the people endure stagnation that is the root cause of the government's unpopularity.

To put Hong Kong's total fiscal surpluses into perspective, it is worth remembering that while the rest of China has fiscal reserves eight time the size of Hong Kong's, China also has a population that is about 180 times that of Hong Kong's, which means that on a per capita basis, Hong Kong has far larger reserves than China or any large country in Asia.

It is true that Hong Kong does not grow its own food and is dependent on financial markets for a third of its GDP and therefore does need to save for a time when the financial markets may not be so buoyant. But most analysts agree that the size of Hong Kong's reserves have now gone way past the size needed for prudence. The IMF for example, recommends reserves of 30 per cent to 50 per cent of a country's GDP if possible, whereas Hong Kong's reserves are now approaching about three quarters the size of GDP.

One justification that Hong Kong usually presents is the need for reserves to "defend" the Hong Kong dollar against "speculators", as happened in 1998. It is true that the Hong Kong dollar has been trading against the US dollar at a fixed exchange rate of HK$7.8 to one US$1 since 1985 and that the government needs large reserves to "defend" this fixed exchange rate.

But the US dollar and the Hong Kong dollar are now both trading near historic lows, and speculators are not trying to push either currency any lower. So the "defence of currency" reasoning is not valid now.

The Hong Kong government is returning some of the reserves to the people. Initially, the government wanted to inject only HK$6,000 per worker into the compulsory pension fund, called the Mandatory Provident Fund, which can be drawn upon only at retirement.

After a chorus of protests, the government announced recently that it would return money to the people in a more liquid form, but details have not yet been announced.

Some of the rebates being proposed by the government, such as a subsidy for those paying electricity charges, suggest a hidden agenda. Critics have pointed out that because electricity charges account for a significant part of the consumer price index in Hong Kong, and since the government is worried about inflation, this subsidy is intended to make sure that the official CPI number show a rosier picture.

Critics also say the "freebies" being handed out by the government will be spent on frivolous pursuits and that the government should focus more on "structural" spending such as improving the skill level of the population. Given the gigantic size of the holdings, the debate on how best to use Hong Kong's fiscal reserves looks likely to continue.