As published on scmp.com, Thursday 16 April, 2020.
Hong Kong has ruled out issuing bonds to cover a widening budget shortfall as the government grapples with the economic fallout from the coronavirus pandemic, but will leave open the possibility of using infrastructure bonds for big projects.
Speaking to the Post, Financial Secretary Paul Chan Mo-po said the city would adhere to strict fiscal discipline, as required by the law, despite the expectation of a “very significant deficit” in the upcoming financial year.
The funding gap could exceed HK$276.6 billion (US$35.68 billion), nearly 10 per cent of Hong Kong’s gross domestic product, Chan warned. But selling debt was not the solution.
“At this juncture, we have no plans to issue bonds to finance the deficit occasionally caused by the anti-epidemic initiatives,” he said. “The market may misinterpret that the government is loosening our financial discipline in order to fund the deficit.”
Chan pointed to Article 107 of the Basic Law, the city’s mini-constitution, which requires the government strive for fiscal balance. Issuing bonds to cover a deficit “is not sustainable in terms of fiscal philosophy, because you are using future capital for current uses”, he said.
“But if we are issuing bonds for future investments, the interpretation would be different, and society will be more accepting.”
In his budget address delivered in February, Chan forecast revenue from land sales – a major source of funds for the government – would drop by 16.6 per cent to HK$118 billion. That revenue is used to pay for new infrastructure, and the minister predicted an average of HK$100 billion would be spent on projects across the next five years.
But given the sizeable expenditure expected, the government would consider issuing bonds for “worthwhile” ones, including the development of railways and near-shore reclamation work. Chan pointed to the extensions of the Tung Chung line, the West Rail line to Tuen Mun South and the Northern Link as possibly deserving bond financing. The budget gave the Mass Railway Corporation the go-ahead to begin detailed planning for the expansions.
The government, however, has not decided on issuing bonds for Lantau Tomorrow Vision, an ambitious proposal to build Hong Kong’s next housing and business hub on artificial islands at an estimated cost of at least HK$624 billion, as that was a long-term development plan.
Chan expected smaller reclamation works carried out near the shore might instead be candidates for such financing.
“Over the past few years, our policy objective in terms of issuing bonds is very specific and clear,” he said, pointing to the previous iBond and green bond programmes aimed at maturing the market for the financial instruments and funding environmentally sound projects.
The finance chief also addressed the economic situation in the United States, where the Federal Reserve’s assets have grown by US$1.92 trillion since February to reach US$6.08 trillion, by printing money and buying bonds from banks. Chan said the government was monitoring the situation.
“Economists and commentators have suggested that this is the only option the United States could choose at the moment, but we still have to evaluate the long-term consequences, whether it will create another asset bubble, and how big it could be,” he said.
Despite the massive relief packages rolled out over the past two months to cushion the economy from the blow of the pandemic, the minister offered reassurances the city still had plenty of money. Fiscal reserves stood at HK$800 billion to HK$900 billion, which he called “a pretty prudent level”.
Chan agreed that, to be financially sustainable, Hong Kong would need to consolidate expenditures and build new sources of revenue, including drawing investors in financial services, asset and welfare management, as well as setting up corporate treasury centres.