New figures from the SAR Government on Hong Kong’s international investment position – basically its investment stock in the rest of the world versus the stock of global investment in the SAR – is a bit of a two edged sword. At first sight the figures are encouraging.

They show that Hong Kong - long acknowledged as a major financial centre and, more recently, as a significant global investor - had a positive overall net investment balance of $2,123.1 billion (US$272.0 billion) with the rest of the world at the end of 2001.

Moreover, the comparative figures with the year 2000, which have also been issued for the first time, show that this positive net investment balance is actually up from the level of $1,729.5 billion (US$221.7 billion) at the close of the 2000 calendar year.

The reason for this improvement is that while the SAR’s investments (Hong Kong’s "assets") in the rest of the world declined in value between 2000 and 2001, they did so at a slower pace than the value of the rest of the world’s assets in the SAR (Hong Kong’s "liabilities").

This may seem ostensibly positive for Hong Kong in that its net asset position improved overt the year and Hong Kong might be able to claim that its investments globally are doing better than global investors in Hong Kong – that is, SAR investors are smarter.

But what does it say about global investor’s view of Hong Kong? Have they been reducing their investments and, if not, are they happy to see them decline in value? This is not the sort of question that can be answered by the figures themselves, but it is one worth contemplating.

It also takes some of the gloss of any perfunctory analysis of the numbers as being overwhelmingly positive for the SAR.

Perhaps somewhat surprisingly, too, the figures show Hong Kong has a negative external investment balance in one of the most important components of the overall picture – Direct Investment (DI) – meaning that overseas direct investment in the SAR is larger than Hong Kong’s in the rest of the world.

This seems to sit somewhat uncomfortably with the Hong Kong SAR’s view of itself as a substantially player in terms of foreign direct investment, especially in relation to the Mainland of China, when it is far stronger in terms of portfolio and "other" investment.

But these are just some minor question stemming the new statistics issued in late June which substantially upgrade the SAR’s overall Balance of Payments figures by recording for the first time (a) its international investment position and (b) its external debt statistics.

The new figures add to, but differ in one important respect from the Balance of Payments figures that have been published since June 2000.

This is because they measure the stock of investment (and debt) at a given point of time (the balance sheet approach), rather than the flows of investment (annual and quarterly) that have been available to date.

Hong Kong’s international investment position (IIP) statistics - the stock of external financial assets and liabilities of an economy - for 2000 and 2001 were issued for the first time on June 21. Its external debt figures were issued a few days later on June 24.

Somewhat oddly, they seemed to attract little media attention, perhaps because at the time the community was spending more time analysing the Chief Executive, Tung Chee Hwa’s new "ministerial" line-up under his new accountability system for principal officials.

But they are significant, nonetheless, especially as they offer further quantitative support for Hong Kong’s role as a significant global investor (and open economy), perhaps especially in relation to the Mainland.

They show that at the end of last year (2001), the reference year for new figures, Hong Kong's external financial assets totalled a massive $8,487.8 billion (US$1,088.2 billion) and liabilities were $6,364.6 billion (US$816.0 billion).

Hong Kong was, therefore, a net creditor to the rest of the world, with a positive balance on external financial assets of $2,123.1 billion (US$272.0 billion) at the close of 2001, equivalent to 168.2 per cent of Gross Domestic Product (GDP).

As the Government pointed out, these substantial figures again reinforce the role of the SAR a highly externally oriented economy with considerable cross-territory investment and also a major financial centre in the region with considerable cross-territory fund positions.

Looking at the major components in Hong Kong’s investment position at the close of the year:

"Other" investment (or OI, which includes currency and deposits, trade credits and loans) accounted for 35.7 per cent ($3,033.4 billion) of the total value, with most held by the banks in the form of inter-bank deposits and loans. This reflects the SAR’s role as an international banking centre in channelling funds to the rest of the world.

Direct Investment (DI), including equity capital, reinvested earnings and other capital, was the second largest at 33.1 per cent ($2,807.2 billion) of the total, emphasising Hong Kong’s position as a major external direct investor to the rest of the world, notably in the mainland of China. It also reflects the common practice of setting up non-operating companies in offshore centres such as British Virgin Islands and Bermuda by Hong Kong enterprises for channelling DI funds back to Hong Kong or to other places.

Portfolio Investment (PI), made up of both equity and debt securities, accounted for 19.3 per cent ($1,639.8 billion) of the total, with 54.8 per cernt being in debt securities and 45.2 per cent in equities.

Reserve (Government) assets (RA) amounted to $866.9 billion or 10.2 per cent, while financial derivatives (FD) assets held by residents were relatively insignificant, accounting for only 1.7% ($140.5 billion) of the total.

Compared with the end of the year 2000, for which figures were also provided, Hong Kong’s total external financial assets declined by 4.6 per cent or $411.5 billion from $8,899.3 billion (US$1,140.9 billion)

Within this total, other investment was down 13.5 per cent and direct investment off 7.3 per cent, more than offsetting the 17.6 per cent increase in portfolio investment 7.2 per cent increase in derivatives and 3.3 per cent increase in reserve assets.

Overall, the net investment overall position at the end of 2001 compared with the end of 2000, was up $393.6 billion, mainly attributable to a significant increase in the net asset position of portfolio investment, which exceeded considerably the decrease in the net asset position of other investment.

On the liabilities side of the balance sheet, the picture was:

Direct investment accounting for 52.6 per cent ($3,349.4 billion), reflecting the high levels of foreign direct investment in the SAR and partly to "round-tripping" of investment whereby the investment funds originated from Hong Kong were channelled through offshore centres back to Hong Kong.

Other Investment liabilities accounting for 31.5 per cent ($2,002.4 billion) of the total, again mainly related to deposits and loans of the banking sector.

Portfolio investment liabilities accounted for 14.6 per cent ($930.4 billion), with equity securities taking 86.4 per cent of the total.

Financial derivatives liabilities owed by residents were also relatively insignificant, accounting for only 1.3 per cent ($82.4 billion) of the total external financial liabilities.

Compared with the end of 2000, total external financial liabilities fell by 11.2 per cent or $805.1 billion. Portfolio investment fell 22.1 per cent during the year, with derivatives off 15. 5 per cent, other investment down 13.9 per cent and direct investment down 5.7 per cent.

Commenting on the figures, the Government noted the sound nature of Hong Kong's international investment position. It said that, at 168.2 per cent of GDP, the net external financial assets compared rather favourably with the latest net external financial asset positions of the G-7 economies.

It also noted that while both external financial assets and liabilities declined during 2001, along with the global economic downturn, the fact that the asset side had declined less than the liability side, meant that net external financial assets went up by 22.8 per cent over the year.

The SAR’s External Debt (ED) statistics, covering non-equity liabilities only and also published for the first time, showed gross external debt of $2,807.9 billion (US$360 billion), equivalent to 223.3 per cent of GDP.

Government debt was zero and most of the rest of the debt (61.2 per cent) was accounted for by transactions in the banking sector. Other components included debt liabilities to affiliated enterprises and direct investors (29.3 per cent), other sectors (8.5 per cent) and the Hong Kong Monetary Authority (one per cent).

SAR BUDGET BLUES

The SAR Government’s financial results for the first two months of the 2002-03 fiscal year revealed a Budget deficit of $14.62 billion for the April-May period.

That makes it the worst beginning to the fiscal year since 1999-2000, when the economy was beginning its recovery from the impact of the East Asian financial crisis of 1997-98.

The $14.62 billion deficit for the two months compares with $17.92 billion in opening two months of 1999-2000, $7.07 billion in the same two months of fiscal 2000-01, and $13.14 billion in the opening two months of last year (2001-02).

Although the worst of those years, 1999-2000, did eventually produce a modest full year surplus ($9.94 billion), that was in a climate in the which the economy was recovering, not the uncertainties that are still apparent today, both globally and locally.

Both the 2000-01 and 2001-02 fiscal years eventually produced deficits ($7.81 billion and a massive $63.32 billion respectively), as did the 1997-98 year ($23.27 billion).

The Government is right to point out, as it did in today’s media statement, that "a deficit in the initial months of a financial year was not unusual as many major types of revenue including taxes were mostly received towards the end of a financial year."

However, a year in which only a modest economic recovery is forecast, cannot be expected to produce the revenues the Government needs to fund present spending.

Significantly, revenue in the opening two months of the current fiscal year was down 3.2 per cent to $23.43 billion, while expenditure increased 1.9 per cent to $38.05 billion.

Given current economic conditions – the still uncertain economic outlook and a lacklustre revenue performance - the need for spending restraint is clear, even with the Government prepared for a $45.2 billion deficit in the full 2002-03 year.