Another red alert comes from the Hong Kong Government’s finances. The authorities said lately that Hong Kong’s recovery after the pandemic is far from expected, and the fiscal deficit may exceed HK$100 billion (US$13 billion). That scenario makes many financial industry insiders worry that if Hong Kong’s fiscal reserves decline further, it will wobble the once stable linked exchange rate mechanism that has been in force for the last 40 years.
In the latest “Policy Address,” the Hong Kong government proposed to reduce the stamp duty on share transactions and adjust the “harsh measures” previously implemented on the property market. Coupled with the reduction in income from land sales and stamp duty expected this fiscal year, as well as the expenditure the treasury needs to cope with the new measures proposed by the policy address, it is likely to have more than HK$100 billion (US$13 billion) deficit. Including this one, there are four years out of the last six that the government has seen deficits, and this year is likely to become the third year of recording over HK$100 billion in negative incomes.
Paul Chan Mo-po, Financial Secretary of the HKSAR, said on October 27 that due to the unfavorable economic situation in overseas countries, this year’s economic recovery rate is slower than expected. It is estimated that the fiscal deficit will be higher than what the budget predicted. At present, there are hundreds of billions of fiscal reserves, which can offer financial support when the economy turns sour. He also reiterated that there is no plan to increase taxes now.
Ngan Po-kong, ex-iCable News Assistant Controller, and a financial commentator, said that Hong Kong’s economy is on the way down, and the income from land sales has fallen drastically, resulting in Hong Kong’s fiscal reserves falling below the alarm level. He estimated that the Hong Kong government is likely to turn its sights on the Hong Kong public (for new revenue sources). From that perspective, Hong Kong people must be prepared for tax increases. What is even more worrying is that the decline in fiscal reserves and foreign exchange funds will affect Hong Kong’s credit rating, as well as the stability of the linked exchange rate mechanism.
To stabilize the local currency, the Hong Kong Government launched the linked exchange rate mechanism in 1983, which runs until today. The Hong Kong Monetary Authority (HKMA) pegs the Hong Kong Dollar against the U.S. dollar through real-time buying and selling of the local currency, to maintain the exchange rate at around 7.8: 1.
Mr. Ngan pointed out that if the exchange rate is allowed to over-fluctuate, the Hong Kong Dollar will have to decouple from the U.S. Dollar, and the former may be linked to RMB or a basket of other currencies. Since Hong Kong relies very much on imports, the sudden depreciation of the local currency, apart from affecting local consumption, will also cause a sharp fall in asset prices, further affecting decisions on consumption, home purchases, and other assets.
The policy address read by Hong Kong Chief Executive John Lee Ka-chiu put much emphasis on the cooperation between Hong Kong and the Chinese mainland as well as the participants of the “One Belt, One Road Initiative” countries, but did not mention any specific measures to attract developed countries like those from Europe and the United States.
In this regard, Li Siu-po, an honorary teaching and research scholar at the Asia-Pacific Institute of Business at the Chinese University of Hong Kong, said that many foreign financial institutions are gradually withdrawing from Hong Kong or reducing their scale here. The reduction in headcounts and expenditure will affect the tax revenue of the Hong Kong government. If Hong Kong’s fiscal reserves deteriorate further, it may need to consider implementing civil servants’ pay cuts like that on the mainland.
