Hong Kong is currently enjoying a record current account surplus, produced by the rapid growth in exports and inbound tourism.
I wonder whether analysts have noticed that Hong Kong's current account surplus has been increasing quite substantially. In 2001 this was equivalent to 7.5% of GDP, or US$12.3 billion. Figures available up till the third quarter of last year suggest that it has been running at nearly 10% of GDP and increasing. Indeed, the estimated current account surplus for the first nine months of 2002 was already US$11.6 billion, 58% larger than that for the first nine months of 2001. The acceleration in the growth of exports and in the number of incoming tourists beyond the third quarter of last year suggests a continuation of that trend.
A current account balance of payments surplus of possibly in excess of 10% of GDP is large by historical standards and would be the highest on record, although 1997 was the first year for which official figures were published. The figure is undoubtedly large by international standards. This says a lot about the current external competitiveness of Hong Kong, though it should be noted that weak domestic demand has contributed to the surplus. The structural adjustment working through over four years of deflation is bearing fruit. What is also interesting is that Hong Kong is now earning much more foreign exchange through exports of goods and services and income from foreign investments than it needs for spending on imports, etc., to the tune of well over US$1 billion a month.
Also of interest is the fact that, there has been, since 1999, more foreign direct investment into Hong Kong than in the other direction, although the latest figures refer only to 2001. This means that, in terms of direct investment, Hong Kong receives more foreign exchange than it pays out.
Where then, you may wonder, has all the excess foreign exchange gone? Given that the balance of payments must be in balance, the answer, of course, is that there has been net capital outflow. The term "capital outflow" is regrettably a rather sensitive one, in view of the danger of its being attributable to a possible lack of confidence in the currency. But in reality there has been no detectable lack of confidence in the Hong Kong dollar exchange rate, as reflected in the fact that the forward premium of the exchange rate is quite small. The net capital outflow may merely be a reflection of exporters choosing to retain more of their earnings in foreign exchange, in view of the lack of investment opportunities in Hong Kong. It could also be that, again because of the lack of suitable Hong Kong dollar assets, surplus funds are being parked in foreign exchange instead of in Hong Kong dollars. Indeed in 2002 the traditionally net long US dollar (short Hong Kong dollar) position of the banking system increased significantly, allegedly for this reason.
There is, of course, another "player" in the balance of payments account and this is the Exchange Fund. An accumulation of foreign exchange reserves by the Exchange Fund represents a capital outflow (which offsets a private sector net inflow) and a depletion represents a capital inflow. As our transparent operations show, there has been no significant capital inflow or outflow for monetary policy reasons. The size of the Monetary Base has remained stable under our robust and rule-based Currency Board system. But for the purpose of funding part of the budget deficit, there has been a need occasionally to sell foreign reserves. This, of course, represents an inflow into the Hong Kong dollar.
Whatever the reasons behind the offsetting flows in the capital account, the increasing surplus in the current account means that the net foreign assets of Hong Kong individuals and institutions, already the highest in the world when measured against GDP, will increase further.
Joseph Yam
20 March 2003
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