Hong Kong’s financial secretary has rejected suggestions the government should issue bonds to raise funds to cover deficits, warning it could shake the public’s confidence in the soundness of the city’s finances and in turn affect fiscal stability and security.
Paul Chan Mo-po also reiterated the need to maintain the Hong Kong-US dollar peg, which he said had provided a good social and business environment. However, he conceded the policy would tie the government’s hands in tackling economic cycles by means of adjusting exchange or interest rates.
The finance minister had earlier sounded the alarm over an expected record budget deficit of more than HK$300 billion (US$38.5 billion) in the financial year ending March. He attributed it partly to a 25 per cent increase in recurrent spending over the past three financial years, with the figure expected to hit HK$486.6 billion in 2020-21.
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While the government last week announced a US$2.5 billion offering of green bonds – fixed income products designed to fund projects that are environmentally friendly – Chan said it would be imprudent to finance recurrent expenditure or deficits through such means.
In a piece posted on his official blog on Sunday, Chan said: “We are of the view that it could bring about big adverse impacts and we should not act rashly”.
“If the investment market is led to think the Hong Kong government has the intention to finance deficits by issuing bonds and thus loosening up its fiscal discipline, I am afraid it could shake investors’ confidence in Hong Kong’s mid- and long-term fiscal situation, and the confidence in the linked exchange rate system,” Chan said, referring to the US dollar peg system adopted in 1983.
“And this could affect Hong Kong’s financial stability and security.”
The Hong Kong unit is pegged to a narrow trading band between HK$7.75 and HK$7.85 per US dollar.
Chan added the stability of the Hong Kong dollar had been built on the city’s huge foreign exchange reserves and financial strength.
“If like other developed countries, we also issue bonds to finance government spending, this could probably trigger market concern that the government will seek to monetise debt,” he warned. “This could exert pressure on the linked exchange rate system and bring about risks of speculation and shorting [of the Hong Kong currency].
“Shorting” is a bet that the currency will fall in value against another one.
Concerns have been growing about the dim economic outlook for the city.
Dealt a severe blow by the recession triggered by the Covid-19 pandemic and social unrest, Hong Kong’s economy shrank 3 per cent in the fourth quarter from a year earlier, resulting in a record full-year decline of 6.1 per cent in 2020, according to advance estimates released last week by the Census and Statistics Department.
Hong Kong last saw such a decline in 1998 when gross domestic product contracted 5.1 per cent after the city’s economy was hit by the Asian financial crisis.
According to the latest figures, the government recorded a cumulative deficit of HK$268.8 billion for the first nine months of the current financial year, from April to December. The government said it was mainly because some major types of revenue, including salaries and profits taxes, were mostly received towards the end of a financial year, and payments in respect of the cash payout scheme and various measures under the anti-epidemic fund.
Fiscal reserves stood at HK$891.5 billion as at December 31, down from HK$1.1 trillion last March.
Economist Professor Terence Chong Tai-leung, executive director of Chinese University’s Lau Chor Tak Institute of Global Economics and Finance, said Hong Kong still had huge fiscal reserves and there was no urgent need for the government to issue bonds to cover deficits.
“Having said that, the government can still consider issuing bonds to raise funds. We can cap the size of our debt to a certain percentage of our GDP so that we can prevent our debt from growing too much. By doing so, we can also help develop our bond market,” he said.