O’Rear Guard Action: David O’Rear returns on Budget 2018

Former Chief Economist of the HKGCC David O’Rear returns to Harbour Times.

David O’Rear is the former Chief Economist of The Hong Kong General Chamber of Commerce in Hong Kong and a legend in Hong Kong economics circles. He currently resides in London and is a former Harbour Times columnist making his triumphant return.

I gave Paul Chan a pass on his last budget as he had only been in office for a very short time. Not this year. Hong Kong’s Financial Secretary just announced that the thin fiction that expenditure should rise only as fast as nominal GDP is no more. From here on out, the sky’s the limit.

The idea of adopting “forward-looking and strategic financial management principles” to optimize the use of the fiscal surplus fails to address the elephant in the room. The problem isn’t that there aren’t enough things to spend money on. Nor is it poor management principles (the surplus itself set fire to that straw man).

This is a structural problem, albeit one most governments would kill for. Until and unless society agrees on spending priorities, taking money out of the economy without any real idea of what to do with that money is irresponsible. More, it’s immoral.

Smoke and mirrors

In 2013-14, the economy grew by $101.3 billion. That year, the fiscal reserves increased by $64.8 billion, or 64% of the economic expansion. I understand that the two, reserves and GDP, aren’t exactly the same. But too few people seem to realize the scale of the growth in the reserves. Comparing them to GDP seems to be a useful proxy.

In the subsequent three years, the rate of confiscation averaged just under 29%, but last year it exploded to 222.4%. That’s right: the amount added to the reserves ($249.1 billion) exceeded the growth in the economy ($112.0 billion). The good news is that the official estimate has the extraction falling to just under 76% this year.

Hong Kong’s fiscal reserves are not “healthy” anymore than a 100kg, 7 year-old child is healthy. They also are not useful for maintaining the fixed exchange rate system; that’s why there’s a massive Exchange Fund ($4,192.5 billion at the end of January 2018).

Raising the issue of the exchange rate is an attempt to confuse and deceive, not to enlighten. The Exchange Fund is 12.8% larger than the net deposit of the entire banking system. It’s 56.8% larger than the money supply (M-1). Shame on you, Mr Chan, for trying to deceive the people of Hong Kong.

Shortly after the Handover, the IMF pointed out that without a broad tax base, Hong Kong would have to maintain a sufficient fiscal reserve – or borrow – to get through the business cycle. Part of the reason for that is the fixed exchange rate regime, which was too rigidly maintained during the Asian Financial Crisis.


It might be nice if the FS were to expand spending and contract revenue extraction during economic difficulties, but that hasn’t been the case. Instead, past budgets needlessly sucked vital monetary fluidity out of the economy during the worst of the North Atlantic Financial Crisis.

So, the obvious thing to do is to stop taking money out of the economy until one can actually come up with a plan to put that money to use. Mr Chan’s solution, however, is to continue issuing bonds. The come in either Silver or Green, and will be quite effective at taking money out of the economy, money the government doesn’t need.

Here’s a better idea, sir. Instead of asking the elderly to buy Silver bonds, why not actually put the money to use? Set aside HK$200 billion, which is less than half of the excess sucked out of the economy over the past five years (and, less than half of the projected surplus to 2022/23). Use the money to look after the elderly, the infirm and the poor.

But, no. On an operating basis, Mr Chan proposes taking an unnecessary $132.2 billion out of the economy over the next five years, money for which he cannot articulate a purpose.

Hong Kong deserves better.


David O’Rear moved from his native California to Asia in 1980, first to Taiwan for language study and later to Hong Kong where he worked in the areas of economic, political and business conditions analysis. After 18 years with The Economist Group, he accepted the post of Chief Economist at the Hong Kong General Chamber of Commerce in 2002. In 2015, he resigned to follow his wife to London, where he exercises his analytical skills on a more ad hoc basis. David has bachelor’s and master’s degrees from the University of California, Berkeley, and is a regular commentator on current events in print and electronic media. He is married to Bonny Fay Landers.