Fund flow in Hong Kong has been widely discussed in recent months. From time to time we have seen analyses and commentaries on signs of outflow, citing different cross-border fund flow data. However, our financial system is just too complex and sizable to be fully understood from a particular perspective, and the economic definitions of these statistics also need to be accounted for when interpreting the numbers. Riding on the Census and Statistics Department’s (C&SD) release earlier today of the preliminary Balance of Payments (BoP) statistics of Hong Kong for the third quarter of 2019, I would like to share some further thoughts on this subject.
BoP is a statistical statement that systematically summarises, for a specific time period (typically a year or a quarter), the economic transactions of an economy with the rest of the world. The statistical statement categorises these transactions into current account, as well as capital and financial account : the current account measures the flows of goods and services, etc; the financial account records transactions in financial assets and liabilities, whereas the capital account measures transactions in capital transfers and non-financial assets, etc. Simply put, the BoP statement records various kinds of economic activities, such as trade, finance and services, conducted between residents of an economy and those of other economies. One point I should emphasise is BoP numbers do not necessarily reflect geographic movements of funds, meaning that transactions not involving cross-border fund flow may also appear on the statement.
According to the data published by the C&SD, Hong Kong’s current account recorded a surplus of HK$74.4 billion in the third quarter of 2019. This suggests that Hong Kong continues to save more than it invests, as was the case in the past. Hong Kong residents have all along converted this extra saving into external financial assets (such as equity securities or debt securities) to earn returns. In the third quarter, an overall net outflow of financial non-reserve assets amounting to HK$163.5 billion was recorded, mainly reflected in a net outflow of HK$90 billion in portfolio investment and a net outflow of HK$75 billion in other investment.
In fact, the net outflow recorded in other investment partly reflected the transfer of funds by the Exchange Fund during the quarter. As we clarified on earlier occasions, this transfer resulted in an increase of foreign-currency deposits placed by the Exchange Fund with local banks. Under the BoP concept, such transfer of funds was regarded as an increase in external assets held by local banks, hence recorded as outflow in other investment. On portfolio investment, HK$90 billion net outflow was not particularly high, when compared with a quarterly average outflow of HK$154.1 billion in 2018 and HK$222.9 billion in the first quarter of 2019. It reflects that Hong Kong people have all along been buyers of overseas equities and bonds.
One may ask whether fund flows recorded in BoP statement would directly affect the level of deposits in Hong Kong’s banking system. In simple terms, BoP fund flows may not have a close relationship with changes in deposit levels : some day-to-day economic activities will be recorded as fund inflow or outflow in the BoP financial account even though they do not entail any change in bank deposits. For example, when a local company exports goods to the US and receives payment using a US bank account, this payment will be recorded as an inflow in the BoP current account and an outflow in other investment in the financial account1. If the company then uses the money in the US bank account to buy US securities, while this does not involve any change in deposits in Hong Kong’s banking system, the outflow in the financial account will simply be reallocated from other investment to portfolio investment. It is nevertheless apparent that these activities do not involve deposits in Hong Kong’s banking system, nor do they indicate what is commonly referred to as “capital flight”.
We understand that fund flow is a topic of interest and concern. In this short article we have tried to explain the rather technical and complex statistical concepts using plain languages to facilitate understanding. We will talk a bit more about how to monitor fund flows in a more timely manner in another piece later on.
Deputy Chief Executive
Hong Kong Monetary Authority
20 December 2019