Hong Kong Continues To Drown In Money

by Mary Swire, Tax-News.com, Hong Kong

29 June 2001

Official figures for Hong Kong's balance of payments and capital investment flows in the first quarter of 2001 show a continuing increase in the SAR's capital stock and liquidity, but some reduction in the massive in and out transfers of money which characterised the year 2000.

The balance of payments surplus amounted to HK$61 bn in the first quarter of 2001, equivalent to 20.0% of GDP, following a surplus of $30 bn (at 9.3% of GDP) in the fourth quarter of 2000. For 2000 as a whole, there was a BoP surplus of $76 bn (at 6.0% of GDP), as compared to a surplus of $78 bn (at 6.3% of GDP) in 1999.

On the capital account, there was overall net inflow of financial non-reserve assets amounting to $62 bn in the first quarter of 2001, compared with $29 bn in 2000. Incoming assets totalled $160 bn, compared with more than $1 trillion in 2000. The surge in net inflow in the first quarter of 2001, says the Government, was mainly due to large net inflows in both direct investment and other investment in that quarter, which more than offset the net outflows arising from portfolio investment and cash settlement of financial derivatives.

A Government Secretariat spokesman noted that Hong Kong's overall external payments position remained favourable in the first quarter of 2001, marked by both a continued surplus in the current account and a further considerable net inflow of financial non-reserve assets in the capital and financial account. These inflows were in line with the ample liquidity in Hong Kong's banking sector. Reserve assets in the first quarter of 2001 thereby increased by the sum of these positive balances.

Although the report, from the Government's Census and Statistics Department, contains a wealth of data underpinning the figures, it is very short on commentary; and indeed it is very difficult to interpret the figures. When last year's figures were published there were accusations that Hong Kong is being used by the mainland to launder massive amounts of illegal flight capital.

Obviously, no-one thinks that asset flows on the scale of GDP are genuine foreign investment, but that doesn't make them 'money-laundering', everyone's favourite scare word of the moment. Alternative explanations would certainly include the movement of mainland hard currency balances stashed in Hong Kong that have now been deployed in the acquisition of 'A' shares in Shanghai and elsewhere, which is hardly 'money-laundering'.

As with last year's figures, the Government is not beating its breast as hard as you would expect, given that the SAR's capital stock has just risen by about 5% of GDP in just 3 months, showing that it understands the questionable nature of some of the underlying transactions.

Whatever the exact reasons for the large financial flows, it's certainly true that Hong Kong is successful as a financial entrepot. Mike Rowse, the director-general of the government's investment arm, Invest Hong Kong, for one believes that the figures simply show that Hong Kong is fulfilling its function as a financial centre. 'The fact that the mainland is using us as its main window to the international capital markets is fabulous,' he enthused in March.

The quarterly report will be put on sale shortly at $14 per copy at the Government Publications Centre, ground floor, Low Block, Queensway Government Offices, 66 Queensway, Hong Kong. It may also be purchased at the Publications Unit of the Census and Statistics Department, 19th floor, Wanchai Tower, 12 Harbour Road, Wan Chai, Hong Kong. Regular subscription can also be arranged with the Publications Sales Section of the Information Services Department (Tel : 2842 8844).

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