The return on the fiscal reserves deposited in the Exchange Fund is low. The SAR government set up a "Future Fund" in 2016 to pursue longer-term, high-return investments, which was once placed on the outside world to become a "sovereign fund".
However, in the past six years, the fund has always been criticized as a "bureaucratic product", lacking an overall development strategy and unable to develop the future at all.
In this regard, Professor Liao Pakwei of the Department of Economics of the Chinese University, who has participated in the construction of the Future Fund, Chen Wenhong, a senior economist in Hong Kong and Director of the Belt and Road Institute of Zhuhai University, Chow Chongming, a lecturer of the Department of Applied Social Sciences of the Hong Kong Polytechnic University, and Hong Wen, a member of the Legislative Council Election Committee. , and talk with "Hong Kong 01" about what the future fund can and cannot do.
The bright return is hard to change by the action style
"The reason we call it the 'Future Fund' is to explore the future," said Hong Wen, a member of the Legislative Council Election Committee who has been engaged in economic policy research for many years. "Look at Temasek's investment model that focuses on local development. If you look at the Future Fund, how much impact has it brought to the local economy, and how much has it contributed to Hong Kong’s economic and financial security?”
It has been six years since the "Future Fund" was established, and it has not yet been able to explore the future.
The crux of the matter is the SAR government's one-sided understanding of the ills of public financial management: low investment returns are certainly a manifestation of "conservativeness", while passive investment management models are another manifestation of "conservativeness".
The "Future Fund" only eliminated the former, but did not reform the latter.
The story of the Future Fund begins with the "2013/14 Budget". The then Financial Secretary, John Tsang, announced the establishment of a long-term financial planning working group to study how to make changes in public finance for an aging population and other long-term financial commitments of the government. Thorough planning.
In March 2014 and March 2015, the Working Group on Long-Term Fiscal Planning released the first and second phase reports respectively, warning that Hong Kong may experience a structural deficit due to an aging population, and that it is necessary to deploy in advance to deal with the crisis.
The first-phase report sorts out and forecasts Hong Kong's fiscal revenue and expenditure, labor structure changes, and public service expenditures in detail in the next 20 to 30 years. Recommendations for optimizing public finances.
The second phase of the report revolves around the proposal to "establish a savings plan", detailing the possibility and specific measures of converting the "land fund" into a "future fund".
The source of assets of the "Land Fund" is the income from land sales during the British Hong Kong period.
The Sino-British Joint Declaration stipulates that from May 27, 1985 to June 30, 1997, the land price income obtained by the Hong Kong government from land transactions, after deducting the average cost of developing the land, shall be divided equally. Owned by the Hong Kong government and the future government of the Hong Kong Special Administrative Region, the "Hong Kong Special Administrative Region Government Land Fund" was established to hold half of the land sales income during the period in trust.
Since the reunification in 1997, this asset has been owned by the SAR government, but no specific arrangements have been made for its long-term use. Therefore, the Provisional Legislative Council passed a resolution in accordance with the Public Finance Ordinance (Chapter 20 "Land Fund", hereinafter referred to as ""Land Fund"). "Land Fund Resolution"), a separate "Land Fund" will be established on the day of handover to receive the above-mentioned trust property and limit the use of the fund.
In the "2016/17 Budget", Tsang Chun-wah announced the establishment of the "Future Fund", using the surplus of 220 billion yuan in the land fund as the first fund, and in the future, more funds can be allocated from the fiscal surplus.
The Future Fund continues the practice of the Land Fund, and is still deposited in the Exchange Fund, which is equally invested in the "Long-term Growth Portfolio" and the "Investment Portfolio". The initial investment period is 10 years and cannot be used unless it is urgent.
However, in 2019, the current Financial Secretary, Paul Chan, pointed out that the "long-term growth portfolio" had a good rate of return, and asked the HKMA to increase the proportion of future funds in the long-term growth portfolio to 60%.
Legislator Hong Wen criticized the Future Fund for failing to develop the future of Hong Kong.
(Photo by Chen Weici)
The overall development strategy has not been considered
The investment objective and style of the Future Fund is simple - long-term investment with high returns, and its investment performance is exactly that (see the orange circles for 2016-2021 in Table 5 of the Exchange Fund's draft for details).
According to data from the HKMA, the investment returns of the Future Fund from 2016 to 2021 are 4.50% respectively.
9.60%, 6.10%, 8.70%, 12.30% and 17.80%, the investment performance is better than the fixed interest rate of the fiscal reserves, and the investment performance becomes more and more bright as time goes by.
Since its establishment in 2016, the Future Fund has achieved a total investment return of 169.2 billion yuan, and its net asset value has increased by 70% in the past six years.
"(In 2021) earning more than 50 billion yuan, which is very good, and the icing on the cake is a good thing." Hong Wen criticized that the long-term growth portfolio that brings high returns to the fund invests in overseas private equity funds and real estate, which is closely related to the development of Hong Kong's local economy. Disconnected, "If you want high returns, you need to invest in private equity and real estate... But, does society depend on these? Today Hong Kong society is divided, polarized, the gap between the rich and the poor is huge, and it is difficult for young people to move upwards. Is it true that 7 million people are all rely on these?"
Chen Wenhong, director of the Belt and Road Research Institute of Zhuhai University in Hong Kong, is also dissatisfied with the performance of the Future Fund. In his eyes, the fund is a typical "bureaucratic product": "If you have money, you put it in the fund to earn income and guarantee income, but you don't have any money. Considering the overall strategic development of Hong Kong, it will not change from time to time or place according to our strategic needs.”
The investment model is the cause, and the return on investment is the effect.
It is true that a future fund that pursues "long-term investment and high returns" can go against the government's past conservative style of public finance.
However, as mentioned above, the drawbacks of government public finance are not only the issue of returns, but also the single and passive investment model, which has not been corrected in the future fund.
The Future Fund is still modeled on fiscal reserves, relying on the investment portfolio within the Exchange Fund and using "passive" investments.
When it is time to "pay the bill" every year, the HKMA will calculate a "comprehensive interest rate" to distribute dividends to the future fund.
However, the Government Investment Corporation of Singapore (GIC) and Temasek Holdings, the Norwegian Government Pension Fund (GPGF), the Alaska Permanent Fund of the United States, and even the Australian Future Fund, which is referred to by the SAR government, all use "active" investments. The benefits of investing to the local economy go beyond high returns.
Taking GIC as an example, "technology" and "sustainability" are the two major themes of its investment, and the setting of the theme can hedge the competition and risks that Singapore may face in the future as a small country.
"Sustainability is an investment issue, and climate change will be an investment risk," said Liew Tzu Mi, Head of Fixed Income at GIC. GIC is for the present and the next generation in Singapore. Designing portfolios around sustainability will It is the core mission of GIC.
Chen Wenhong pointed out that there are logical problems in the establishment of the Future Fund.
(Photo by Su Weiran)
Investing in the future should not fail
It is undeniable that the Future Fund also takes into account the risk that Hong Kong will encounter in the future - the problem of population aging.
However, Chen Wenhong criticized that there is a logical problem in the statement: "Population aging is an abstract expectation, and the corresponding urban planning, economic structure, and employment will change, and the fund needs to promote transformation. Now (the future fund) means "population aging", Then I save a sum of money, I don’t know what to do with it, and I don’t know when it will be used.”
"This is not a normal practice, this is a political cross." Chen Wenhong pointed out that the corresponding solutions to the aging population include increasing immigration, adjusting the economic structure to increase the jobs needed in the future to attract young people, and enhance economic competitiveness.
But the irony is that even if the government finds that it may encounter a crisis of population aging in the future, the government's "saving money" is only to solve the "consequences" of labor shortages, rather than fundamentally solve the "uncompetitive" demographic structure. cause".
Chow Chongming, a lecturer at the Hong Kong Polytechnic University, also pointed out that "population aging" does not necessarily need to be solved from the perspective of "increasing social welfare expenditure", but should actively invest in "silver technology" for deployment, such as using "artificial intelligence" technology to optimize the "Ping An Bell" service , Identify the health risks of the elderly, and can also be used to invest in related biomedicines.
He believes that if government funds such as the Future Fund and the Hong Kong Growth Portfolio actively invest in issues related to sustainable social development such as environmental protection and aging, they can hedge the financial and economic pressures brought about by these structural crises. future!"
To be fair, it is not that the future fund has not considered the possibility of active management.
For example, the Working Group on Long-Term Fiscal Planning in that year listed seven economies in Australia, Canada, Germany, Japan, Singapore, Switzerland and the United Kingdom’s fiscal measures to deal with population aging, and also mentioned the sovereign funds of other economies, including the Norwegian government’s global pension fund, The Descendants Fund and the Chilean Pension Reserve Fund even include overseas sovereign funds as references.
However, when the future fund is launched, why are these experiences not absorbed, but a passive and single investment model?
With this question in mind, "Hong Kong 01" interviewed Professor Liao Pakwei of the Department of Economics of the Chinese University of China.
He used to be the director of the Institute of Global Economics and Finance of the Chinese University of Hong Kong. At that time, he participated in the whole research work of the long-term financial plan as one of the five non-official members of the long-term financial planning working group.
As one of the five non-official members of the Long-Term Financial Planning Working Group, Professor Liao Pak-wai of the Department of Economics at CUHK participated in the whole process of the long-term financial planning research work.
(File photo / United Hong Kong Fund)
Future Fund is not a sovereign fund
"Future Fund is not a sovereign fund." Liao Baiwei first clarified the concept.
He emphasized that the word "sovereign" is "politically incorrect", and even if the future fund and the sovereign fund carry similar functions, they cannot be called a sovereign fund.
He also pointed out that there are three major differences between future funds and sovereign funds in the traditional definition.
First, the source of funds is different. The future fund is transferred from the land fund, and the follow-up funds are allocated from the fiscal surplus. "You can say that we are a resource fund, but most of them are surpluses from the fiscal budget." Other sovereign funds such as Norway and Alaska both get their money from oil reserves.
Second, the purpose of the fund is different. The future fund is used to prevent the financial strain caused by the aging of the population, rather than the "pension fund" or "retirement fund" that has been used for the above-mentioned funds. "We have a broader definition. Use is excluded, neither targeted nor limited.”
The third is the difference in organizational form. The Future Fund is managed by the Exchange Fund, and there is no special structure to manage the fund.
"It's a big difference." Liao Pak-wai, for example, Singapore set up Temasek to manage wealth funds, while most other economies have established business entities (Entity) to operate funds, "but we used a simple method to deal with this issue. There is no legislation to organize and manage new institutions.”
The reporter asked, why the future fund should adopt a simple method and not establish an entity?
Liao Baiwei first responded with a smile, asking the reporter to "guess", and then said that he had already discussed it in the report.
In Chapter 1 of the Report of the Working Group on Long-Term Fiscal Planning (Phase 2), three options for future fund institutional arrangements were listed:
First, establish funds through administrative channels.
A nominal account named "Future Fund" is set up in the fiscal reserve, which mainly includes the balance of the Land Fund and the corresponding investment returns. Its investment is still regulated by the Land Fund Resolution and is handed over to the HKMA for management.
Second, the establishment of a corporate management fund.
Establish a statutory body with an independent authority and governance structure. Its operation is based on a business model and enjoys a high degree of autonomy. "The operation model can be modeled after Temasek or a Korean investment company." Third, set up a trust fund.
Following the path of the "Care Fund" and "Film Development Fund", a statutory or non-statutory trust fund is established.
Similar to the corporate scheme, in addition to its own authority, it also has an executive committee and an investment committee.
Liao Pak-wai revealed that when the SAR government was considering the establishment of the Future Fund, it was the outbreak of the occupation in 2014. In order to avoid the risk of parliamentary disputes, the authorities decided to adopt a convenient management method.
(file picture)
Avoid political risks and simplify management
Liao Pak-wai recalled: "It takes time to establish an entity... It was the 'Occupy Central Movement' in 2014, and there was a lot of debate in the Legislative Council. We had political concerns, so we adopted a convenient method and avoided the Legislative Council. ”
The so-called "convenient method" refers to the first option, which is to set up a fund through administrative means. It only needs to be debated by the Legislative Council when the government's annual appropriation is made, and the fund is managed in accordance with the "Land Fund Resolution", without the need for additional legislation.
In contrast, the latter two schemes involve the establishment of separate management bodies and regulations, require multiple defenses by the Legislative Council, and may encounter greater political variables.
Thus, the report publicly supports the first option: "The working group recommends the most efficient and cost-effective administrative approach to establishing a 'Future Fund'."
Liao Pak-wai added that even with the adjusted Future Fund proposal, there were still voices of opposition in the Legislative Council: "The concern of the 'opposition' is what will happen to the lives of the lower classes after the money is taken away, and why is the money not used to improve people's livelihood... .... It was also explained at the time that this money is to get more returns, and there will be less opposition."
The tense political environment is gone forever. Does it mean that there is a possibility for funds to get rid of "passive" management in the future?
"The key depends on the investment objectives of the Future Fund." Liao Pak-wai said that the objective of the Future Fund is "high return", so it is mainly invested in the long-term growth portfolio with the highest risk-return under the jurisdiction of the HKMA, "but if there are other purposes, such as It is not financial growth, but the hope of investing in projects to help the local economy grow. That is another matter. In this case, it may not be appropriate for the money to be managed by the Exchange Fund, that is, the civil service system. They do not have corresponding Investment experience may not be good.” He added, “Of course it needs an entity, and it can be done today.”
The details are published in the 331st issue of "Hong Kong 01" electronic weekly published on August 22, 2022.
Sovereign Fund.
1 | How far are we from the "sovereign wealth fund"?
Sovereign Fund.
2 | The Exchange Fund - the sovereign fund of the wealthy treasury following the Hong Kong-British style of seeking stability.
3｜Future Fund - a "bureaucratic product" that cannot develop the future