Friday, November 06, 2015

When Norman Chan Tak-lam, the chief executive of the Hong Kong Monetary Authority, said the situation was out of his hands the comment was misconstrued as an excuse for the record quarterly loss of the Exchange Fund.

As a currency board, the only function first and foremost for the HKMA is to maintain the peg.

In other words, the value of money in our pockets or in the banks is protected at all cost. It is therefore reasonable for the HKMA to also supervise the banks to contain the systemic risk.

Ironically, the HKMA has been under pressure to chase higher returns, inevitably making the value of the Exchange Fund more volatile. Although there are strict rules in play for the Exchange Fund backing the peg, and every Hong Kong dollar is backed 100 percent by the US dollar of equivalent value, there is more discretion for the government fiscal surplus managed by the fund.

Not too many governments in the world have a fiscal surplus so it is happy problem for Hong Kong. The question is, who should be managing the fund? I cannot recall any central bank in the world taking such an active role in managing a government surplus.

Perhaps it is time for us to review whether it is a good idea to pool the fiscal surplus into the Exchange Fund.

It may seem to have economies of scale by having a single centralized fund. Some even suggest that we should also pool the Mandatory Provident Fund so the HKMA may achieve even higher efficiency.

In reality the bigger the fund the more difficult it is for the fund manager to maintain the marginal return. In theory, if pooling money helps the rate of return the world should put together all the money and form a mega fund so everyone gets a bigger share of the pie. It is obviously not the case.

On the contrary, we should question why the government maintains such a high level of surplus. Wouldn’t it be better for it to leave more money in our pockets so we decide how it should be spent or invested?

Even if the HKMA has done a fairly good job managing the government surplus in the past, I am sure leaving the money to the people would create an even better long- term result. Simon Lee is a business consultant