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Financial Blog Corliss Group: We know there are problems in the financial system, but not how bad they are

Two unconnected statements from authorities in the US and Britain in the past 24 hours should cause concern for those who worry that the global banking system has become more dangerous in the six years since the crisis, not less.

On Wednesday, the US Federal Reserve published its annual bank capital plan review that saw the North American businesses of Citigroup, HSBC, RBS and Santander all rejected for what it said were “qualitative concerns”.

This morning, the Bank of England’s Financial Policy Committee (FPC) released a statement from its latest meeting in which it warned obtusely that “changes to the structure and functioning of markets as banks adapted business models to the aftermath of the financial crisis” meant it had become more difficult to assess the impact of “unexpected developments from any source”.

What the Fed and the Bank both appear to be saying is that big banks remain too complex and that changes made to financial and bank regulation since the crash in 2008 have resulted in the job of assessing systemic risk becoming much harder.

Left unspoken to a large extent in both statements was the spectre of growing financial risks in emerging markets.

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Financial Blog Corliss Group: Citic's mega takeover deal comes as win-win for Beijing and Hong Kong

One move, two gains. Nowadays Beijing and Hong Kong may not agree on a lot of things, but the Citic deal is clearly a win-win for both sides.

Beijing’s decision to let a Hong Kong-listed unit of Citic Group take over its parent company in a deal valued at about 225 billion yuan (HK$283.6 billion) surprised the financial community on Wednesday evening. In fact, the more surprised you feel, the clearer Beijing’s resolve to reform its economic structure.

If you read the history of Citic Group - how the firm was founded with special permission from the late paramount leader, Deng Xiaoping, about 35 years ago as the first new type of state-owned enterprises to help the mainland attract foreign capital and expand investments abroad - any big decision about the company will not be made without approval by the very top-level mainland leaders.

That is to say the asset purchase of Citic Group by Citic Pacific, the Hong Kong-listed steel-to-property conglomerate, is more than just a mega-sized acquisition; it means the beginning of a new round of government-led reforms on its major state-owned enterprises through completely new thinking, such as letting the “son” (Citic Pacific) acquire its “father” (Citic Group in this case).

Such a son-to-acquire-father-move is controversial in that it rarely happens in the mainland’s business world, in particular to any significant state firm the size of Citic, which is a sign of how desperate Beijing is to reform its state enterprises, many of which have often been linked with big bribery and corruption scandals. They are also under pressure to be transparent about corporate governance and show increased management efficiency.

Interestingly, about 35 years ago when Deng invited Rong Yiren to launch Citic Group, formerly known as China International Trust and Investment Corp, Beijing faced more or less the same challenges as it did with economic reform today. Rong was one of the top business tycoons from Shanghai who was later appointed one of the vice-presidents of the government and divided his time in business and politics among Shanghai, Hong Kong and Beijing.

Deng’s idea to create Citic Group was to have something that never happened before and he made it very clear that he wanted the firm to have first-class international standards.

"Xiaoping told [Rong] three things: you are in charge of all decisions, you find whoever you want to hire and we will help you break and stay away from all administrative disturbance," Min Yimin, a former board member of Citic Group, said in a 2009 interview with Phoenix TV.

What happened to the group later did not disappoint Deng. It is now a steel giant, the mainland’s top securities house and a major commercial bank, among others. To some extent, it is a bit like Singapore’s sovereign wealth fund Temasek. But it has also been stuck and is unsure of what it can do next in the country’s latest wave of economic reforms.

For Citic Group, history repeats itself 35 years on.

Since taking charge about a year ago, Premier Li Keqiang has made his top priority keeping the mainland economy growing (and to make that happen, the government must boost efficiency of its big state enterprises) and repeatedly emphasised the urgency in reforming the state sector. The message from Li and other senior officials is very clear: if not now, when?

The Citic deal gives the answer to when. It is happening right now and right here in Hong Kong, and Citic Group is picked again as a pioneer among the state enterprises to join this new round of reform.

If successful, the deal would give Hong Kong a huge boost as doubts have grown rapidly about the city’s leading position as a financial centre. Competition has arisen, for example, from Shanghai’s 2020 international financial centre plan, as well as from New York and London, given the economic recovery in the United States and the euro zone since the 2008 global financial crisis.

After the deal is completed, Citic Group is supposed to move its headquarters to Hong Kong. Just recently during Chief Executive Leung Chun-ying’s trip to Beijing, he also requested more state firms to consider Hong Kong as the destination for their Asia-Pacific headquarters. Leung is definitely getting something that is much bigger than what he expected.

The most recent setback for Hong Kong’s financial centre ambition is the decision by Alibaba, the mainland’s No1 e-commerce firm, to launch its US$15 billion listing in New York.

The city lost the deal mainly due to its strong defence and unwillingness to change its regulations for just one company’s special management structure. Alibaba executives have publicly raised doubts whether Hong Kong is out of fashion and stuck in its own legacy, unable to catch up with the changing times.

Bill Stacey, chairman of Hong Kong’s home-grown think tank Lion Rock Institute, told the South China Morning Post that the Citic deal should definitely be considered as a move by Beijing to strengthen Hong Kong as the leading financial centre for China and the world.

Financial Blog Corliss Group: For Americans in China, the Taxman Cometh

The long arm of the American tax man has officially reached its way to Hong Kong. The question is, will it extend to the rest of China?

Hong Kong, a special administrative region of China, signed an agreement with the U.S. on Tuesday to share tax information about Americans who work or have assets in the southern Chinese city. The agreement is part of the U.S. government’s global campaign against tax evasion and an attempt to recover an estimated billions worth of lost revenue.

The information-sharing agreement is strictly that – the two tax authorities will trade files on an individual if one authority asks for it. Since Hong Kong doesn’t demand taxes from its residents who live abroad, it’s likely the information sharing will be a one-way exchange.

More importantly, the agreement is a precursor to an expected inter-governmental deal that will see the enforcement of the U.S. Foreign Account Tax Compliance Act, or FATCA, in Hong Kong. Under such an agreement, the U.S. government would require financial institutions to disclose details about American-held bank accounts to the U.S.

Initially slated to take force in January of this year, FATCA requires all U.S. citizens and green card holders who reside outside the U.S. to disclose their accounts and financial information. It’s triggered a substantial backlash: Many in Asia have given up their U.S. citizenship or green cards rather than put up with all the paperwork and additional tax liabilities. At the same time, many private banks in Hong Kong have begun refusing to take on the accounts of U.S. citizens and green card-holders, saying the cost of the tax-related paperwork is too great

Though FATCA has been in the works for years, its implementation has been delayed to July 1, partly because many countries haven’t yet signed agreements to abide by its rules. In Asia, only Japan has signed an intergovernmental deals to be fully FATCA-compliant. Hong Kong said on Tuesday a deal is in the works.

Now, all eyes are on China and how the rest of the country will deal with the FATCA.

“The general expectation is that that China will sign,” said Charles Kinsley, tax partner at KPMG in Hong Kong. “Many mainland financial institutions in China are already working on FATCA projects.” (Take note, rich Chinese investors looking for green cards in the U.S.)

What’s at risk if a country doesn’t sign on? A lot of headache for its banks. The U.S. has said that financial institutions from countries who don’t sign onto a FATCA agreement will be subject to a 30% withholding tax from any of its U.S.-related business. For that reason, many banks and other financial companies are hoping their home governments sign on.

“For Hong Kong’s financial institutions, this is a good thing,” said Mr. Kinsley of Hong Kong’s Tuesday announcement.

As for Americans who hope to avoid the IRS by stashing cash in foreign bank accounts? “They’re certainly going to be under pressure,” he said. “Banking secrecy is the thing of the past.”

Financial Blog Corliss Group: Traders profit from RMB arbitrage in Hong Kong

Speculators who want make a profit by taking advantage of the forex spread difference between the renminbi and other currencies should not think of this as a risk-free practice because currency arbitragers may have incurred huge losses due to the recent sharp dive in the Chinese currency, reports Chinese web portal Tencent QQ.

Individuals can earn money from foreign exchange arbitrage, buying currency in one financial market and selling it for a profit in another. For instance, while mainland China has strict currency controls in place, Hong Kong is open to currency transactions.

While the renminbi continued its upward trend, speculators from around the world had bought the Chinese currency through the foreign exchange market in Hong Kong, driving up the value of the renminbi. These investors also discovered they could earn a considerable profit by investing the Chinese currency in Hong Kong, the report said. However, they needed to meet two requirements before taking advantage of the forex spread. First, they had to be part of an export and import business. Second, they had to have a partner in banks located in Hong Kong.

Due to Beijing’s currency control policy, large amounts of the renminbi could only be channeled in or out through trading or underground banks. If an investor took US$1 million from a Chinese bank and converted it into 6.2 million yuan based on an onshore exchange rate of 6.2, they could import a commodity from Hong Kong and pay the local suppliers in renminbi, namely offshore renminbi, the report explained.

The investor could then convert the renminbi into US dollars at a higher exchange rate of 6.15 through his partner in Hong Kong. The value of the renminbi would then become US$1.00813 million.

Eventually, the individual could also export the imported goods to his Hong Kong partner and be paid in the greenback. This meant that the investor could earn US$8,130 from the process, the report explained.

In addition to the forex spread, currency arbitragers could earn the interest rate spread between banks in China and Hong Kong, given Hong Kong’s low interest rates, the report added.

Financial Blog Corliss Group: ‘Visitors from Hong Kong top spenders at Indian hotels’

Visitors from Hong Kong have topped the list of travellers paying the most for hotel accommodation in India in 2013, parting with an average Rs 8,061 per night, which is six per cent more than what they paid in 2012, says a report.

Visitors from West Asia stood at the second place, paying Rs 7,909 a night, followed by South Africans, who paid Rs 7,594, said in the report.

"Travellers from Hong Kong paid the most for hotel accommodation in India in 2013, paying Rs 8,061 a night. This is a 6 per cent increase when compared to what they paid in 2012," according to Hotel Price Index (HPI).

Travellers from both West Asia and South Africa paid 3 per cent and 4 per cent, respectively, more than the previous year, it showed.

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Many of the highest increases were paid by visitors from Europe.

Among the European nations, travellers from Belgium parted 25 per cent more at Rs 6,363, Finland (22 per cent) at Rs 6,187 and Italy had the same percentage increase, taking its average to Rs 6,098.

Thailand and China were the fastest risers in Asia with the former up 23 per cent at Rs 6,903 at and the latter up 17 per cent at Rs 7,115.

Of the few countries whose spendingdeclined, the Brazilians saw the hardest fall, parting with 10 per cent less during 2013 to Rs 6,645, followed by Japan with its own devalued currency deterring foreign travel, down 6 per cent to Rs 7,154.

Other countries that spent less and were seen at the bottom of the list includes Malaysia where travellers paid the least at Rs 5,315 per night, registering a drop of one per cent, followed by the Russians, down 2 per cent to Rs 5,510 and the Taiwanese, down 5 per cent to Rs 5,517.

The report, which also listed the top destinations for overseas visitors coming to India, said that Delhi, Mumbai, Goa, Bengaluru, Chennai and Jaipur continued to reserve the top six spots in 2013.

Agra, the Indian city that is known to attract international tourists the most, has dropped two spots. The land of Taj


Financial Blog Corliss Group: Desperate for breathing room

The slowdown in the economy after 2010-11 has had a ripple impact on the fortunes of India Inc. and lenders alike. With gross domestic product (GDP) growth decelerating from 8.4 per cent in 2010-11 to the sub-five per cent level in the first three quarters of the current financial year, the number of companies seeking succour from lenders under the aegis of the corporate debt restructuring (CDR) cell had almost doubled to 605 as of December 2013 against 305 as of March 2011.

Further, there has been a 194 per cent jump, from []1,38,604 crore at the end of March 2011 to []4,07,656 crore as of December 2013, in the amount of loans that came up for recast.

Therefore, it is not surprising that bank managements, in their internal meetings and conferences with the media and analysts, are devoting as much time fielding questions on the loans that had to be restructured in a quarter vis-à-vis loans that have gone sour.

Myriad problems

Many factors have forced companies to approach banks for a loan recast. These include the slowdown in domestic as well as global demand, volatility in input costs, adverse currency movements, and projects getting stalled for want of statutory approvals such as environment and forest clearance.

Other reasons include diversion of funds into real estate, diversification into unrelated businesses, and too much debt on their balance sheets.

Under CDR, lenders, among others, make concessions to corporates by reducing interest rates, extending the repayment schedule, providing additional funding, and converting debt into equity/preference shares (to a limited extent).

The CDR cell is the banking industry’s common platform for corporate debt restructuring. All references for corporate debt restructuring by lenders/borrowers are made to this cell.

The CDR mechanism covers only multiple banking accounts, syndication/consortium accounts, where all banks and institutions together have an outstanding aggregate exposure of []10 crore and above.

Industry-wise classification shows that the infrastructure sector topped the corporate debt restructuring list, accounting for 19.63 per cent of the total quantum of debt ([]2,07,635 crore) being handled by the CDR cell as of December 2013. The iron & steel sector was a close second with 17.92 percent.

Plugging loopholes

The economic downturn provided the perfect pretext for some unscrupulous company promoters to try and wangle concessions from banks.

There have been cases where the realization that a corporate is going down the chute prompted some bank chiefs, especially from the public sector, to push it to the corporate debt restructuring cell just so they could get a breather on the asset classification front and save on provisioning.

In such cases, company promoters have ‘gainfully’ utilized the time taken by the lead bank to conduct techno-economic viability studies and stock audit to take a call on accepting/rejecting the debt recast proposal to alienate (sell) the assets pledged to banks.

The RBI has seen through this game and prescribed tighter norms for reviving distressed assets. So has the CDR cell.

The lead bank in a consortium of lenders is now required to conduct an audit of how a company has utilized a loan before processing its request for a debt recast.

According to Raj Kumar Bansal, Chairman of the CDR cell, the lead bank in a consortium could also press for a special audit wherever diversion of funds and fraud are suspected.

To ensure company promoters’ commitment to the debt recast package, the lenders now compulsorily take a personal guarantee from promoters.

The CDR cell also requires minimum promoter equity contribution in all cases to be either 25 percent (against 20 percent prescribed by the RBI) of a lender’s sacrifice or 2 per cent of the restructured debt.

The time given to a company whose debt restructuring has been approved by the cell to turn around has been cut to eight years (from 10 years) in the case of infrastructure companies and five years (seven years) in the case of non-infrastructure companies.

Banking on a rising tide

The stiff norms seem to have slowed the flow of debt recast proposals. Overall, in the first 11 months of the current financial year, the CDR cell received debt recast references with respect to 91 companies (against 129 in the whole of the previous year), aggregating about []1,22,500 crore ([]91,497 crore in 2012-13).

With few days to go for the fiscal year to end, bankers expect the overall quantum references to the cell to touch about []1.30 lakh crore in 2013-14. Until the economy turns around, companies will keep knocking on the doors of the cell for succour.

As a rising tide lifts all boats, so, too, bankers hope an economic upturn will bring down the number of cases referred to the CDR cell.

The above article is a repost from TheHinduBusinessLine

Financial Blog Corliss Group: Wall Street accountable after the crisis

How the Government Botched Its Effort to Hold Wall Street Accountable After the Crisis

The Department of Justice (DOJ) fell down on many of its efforts to hold Wall Street accountable for mortgage fraud after the crisis, according to a new audit from the U.S. Department of Justice Office of the Inspector General (OIG).

The DOJ promised the public that it would place a priority on going after mortgage fraud. But the report finds that “DOJ did not uniformly ensure that mortgage fraud was prioritized at a level commensurate with its public statements.” One telling example is that the Federal Bureau of Investigation (FBI) ranked mortgage fraud as the lowest threat in its lowest crime category. The OIG also visited FBI field offices in Baltimore, Los Angeles, Miami, and New York and found that either it was a low priority or not even listed as a priority. Meanwhile, the FBI got $196 million in funding to investigate mortgage fraud between 2009 and 2011, yet the number of agents doing the investigation decreased in the same time, as did the pending investigations.

On top of these findings, the OIG reports that data was so poorly collected at the DOJ that it’s difficult for it to assess what was going on. And this bad data also led to the department misleading about its efforts to the public. In October of 2012, Attorney General Eric Holder announced a press conference that his department had filed 110 federal civil cases that involved more than 73,000 homeowner victims and total losses of more than $1 billion. When the OIG followed up about these numbers, it became clear that there were significant errors with them — the total losses, for example, were $95 million, 91 percent than originally claimed. Yet the department kept referencing these numbers even after it realized its mistakes.

The report does have some praise for the DOJ. It offers two examples of where the department prioritized going after mortgage fraud: “the Criminal Division’s leadership of its mortgage fraud working group and the FBI and USAOs’ participation on more than 90 local task forces and working groups,” it notes.

A spokeswoman for the DOJ also pointed to the fact that the number of mortgage fraud indictments almost doubled between 2009 and 2011 and that the number of convictions rose by more than 100 percent, saying, “As the report itself notes, even at a time of constrained budget resources, the department has dedicated significant manpower and funding to combating mortgage fraud.”

But the audit’s findings are disturbing given the scope of fraud and how little justice homeowners have seen since the crisis. Prosecutions for financial fraud hit a 20-year low in 2011, in the wake of a crisis created by risk-taking on Wall Street. Lawmakers continually prodded the DOJ over what they felt was an attitude that banks were “too big to jail,” “too big for trial,” or that they had a “get out of jail free” card.

Meanwhile, the national mortgage settlement struck in 2012 over servicing abuses has brought very little relief for homeowners. Two years later, most banks are flouting the terms, as only two were fully in compliance, and servicers are still rampantly abusing homeowners. Meanwhile, little of the money set aside to help homeowners dealing with foreclosure has actually reached them, and some of the checks were so small homeowners refused to cash them.

Other efforts to hold Wall Street accountable after a crisis that took as much as $14 trillion — or perhaps even more — out of the economy haven’t produced many results. Just one financial executive has been held accountable, while most banks have walked away with settlements that aren’t nearly as large as they at first may appear. The Securities and Exchange Commission has won back just $2.7 billion in fines, penalties, and disgorged profits, and while it started demanding that banks admit to wrong doing in settlements, there is evidence it may be throwing the towel in on prosecutions related to the financial crisis.

Over the last few decades, the average person’s interest in the stock market has grown exponentially. Because of the lack of stock-market-related websites that impart the steps required to begin trading safely. Feel free and read more articles about stock-market education and only relevant and essential information required to trade shares on the stock market.

The above article is a repost from Storify

Financial Blog Corliss Group: Russia Admits That Its Economy Is In Crisis

MOSCOW (Reuters) - Russia’s government acknowledged for the first time on Monday that the economy was in crisis, undermining earlier attempts by officials to suggest albeit weakening growth it could weather sanctions over Ukraine.

Moscow markets wait to see the full scale of western measures over the seizure of Ukraine’s Crimea and support of its referendum to join Russia, after losing billions of dollars in recent weeks in state and corporate money.

For weeks, Russian officials have said the confrontation between Moscow and the West over Ukraine that threatens economic sanctions and asset freezes would “weigh on the economy”.

Although not speaking directly about the impact from the conflict, Deputy Economy Minister Sergei Belyakov said on Monday the economy was in trouble.

The economic situation shows clear signs of a crisis,” Belyakov told a local business conference.

European officials have said they are determined to hit Russia for its actions in Crimea, imposing sanctions including travel bans and asset freezes on those responsible. The United States is expected to take similar steps on Monday.

"People are most afraid of sanctions. Their volume and .. what sanctions there will be and how this will be reflected on the Russian financial system, the economy, the markets and the largest companies,” said Konstantin Chernyshev, head of research at Uralsib in Moscow.

Many economists expect Russia to enter recession and most have rushed to slash their growth forecasts as a result of the worst showdown between Russia and the West since the fall of the Berlin Wall.

"Domestic demand is set to halt on the uncertainty shock and tighter financial conditions, likely dipping the economy into a recession over second and third quarter of 2014," Vladimir Kolychev and Daria Isakova, economists are VTB Capital wrote in a note on Monday.

"We are lowering our full-year growth outlook to 0.0 percent, and see downside risks if uncertainty remains elevated for a protracted period and/or severe sanctions are imposed."

The Economy Ministry’s most recent estimates, issued before the escalation of the Ukrainian crisis, envisage the economy expanding by around 2 percent this year.


Economist have warned ever since President Vladimir Putin declared on March 3 a right to invade Ukraine to defend the Russian-speaking population that the price Moscow will pay for its decisions will be hefty.

The ruble-denominated MICEX index has lost more than $66 billion in market capitalization and the central bank has spent more than $16 billion of its reserves to defend the ruble. Only last week, MICEX lost 7.6 percent and the dollar-denominated RTS more than 8 percent.

In a matter of a few weeks Russia has gone from being perceived as one of the more resilient emerging markets to the withdrawal of the United States monetary stimulus to one of the most vulnerable developing countries, analysts said.

"Russia’s economy was struggling even before the recent rise in geopolitical tensions surrounding Ukraine and some softer economic data from China," said Alexander Morozov, chief Russia economist at HSBC in Moscow. "Possible economic and financial sanctions on Russia add to the uncertainties."

President Vladimir Putin has said Russia will respect the decision of the peninsula’s people and the country’s two houses of parliament said they would work as quickly as possible to pass legislation for its accession.

Putin is due to address the parliament on Tuesday in what is broadly expected to be an official recognition of Crimea’s appeal to include the region into Russian territory.

Capital has been fleeing Russia in billions since the start of the year. Former Finance Minister Alexei Kudrin and a series of economists see capital flight at $50 billion in the first quarter, compared to $63 billion seen in the whole of 2013.

The ruble is down 11 percent against the dollar this year, continuously breaking through all-time lows.

The Russian central bank vowed on Friday to provide for financial stability after the standoff with the West over Crimea, after unexpectedly raising key rates by 150 basis points in early March to stem capital flight.

The bank, in possession of the world’s third-largest stash of gold and foreign reserves, which stand at $494 billion, has some room for maneuver. But if the tensions in Ukraine escalate, the bank may burn through the reserves quickly.

"It has become patently clear over the last several days that the Crimean peninsula is the prelude to wider and much more dangerous geo-political tensions over the fate of the Ukrainian mainland," Nicholas Spiro, managing director of Spiro Sovereign Strategy in London said in a note.

Financial Blog Corliss Online Group: Barcelona have transfer budget of up to 60 million euros

BARCELONA (Reuters) - Barcelona will have up to 60 million euros to spend on new players in the close season, according to the man in charge of their economic affairs.

"Barca is in a position to buy four players," vice president Javier Faus told Catalunya Radio. "We have between 50 and 60 million euros net for signings."

The club brought in one player last summer, the controversial signing of Neymar that prompted allegations of misappropriation of funds and tax evasion and resulted in the resignation of president Sandro Rosell.

Including a payment of 13.5 million euros to the Spanish treasury after fraud charges were laid against the club, the Brazil forward ended up costing just under 100 million euros, close to the record fee arch rivals Real Madrid paid for Wales winger Gareth Bale last year.

Barca did not sign anyone in the January transfer window, disappointing some fans unhappy with a series of shoddy displays in defence.

At the least, the Spanish champions will need replacements for goalkeeper Victor Valdes and captain and central defender Carles Puyol who have said they are leaving at the end of the season.

There are also question marks over the futures of reserve goalkeeper Jose Manuel Pinto and full back Martin Montoya because their contracts expire in June.

Borussia Moenchengladbach sporting director Max Eberl hinted in January that Marc-Andre ter Stegen would replace Valdes after the Germany keeper rejected a contract extension with the Bundesliga club.

The 21-year-old has a contract until 2015 but Eberl said he had turned down a new deal and the Bundesliga outfit had decided to allow him to join “a top European side”.

Barca may be in the market for a second new centre back as academy graduate Marc Bartra has yet to win the full confidence of coach Gerardo Martino.

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Financial Blog Corliss Online Group: Another deficit of clear thinking among Hong Kong’s fiscal planners

Philip Bowring is appalled by the report on fiscal planning that seeks to preserve the status quo, to protect mega infrastructure spending, yet utterly fails to address our critical challenges

In 40 years of covering Hong Kong budgets and fiscal issues, I have never seen a document as misleading and contentious as the report of the Working Group on Long Term Fiscal Planning. It is a crude attack on health and welfare spending in order to find money for already bloated infrastructure spending.

To add insult to injury, the group is mainly comprised of officials and academics enjoying huge health and pension featherbeds at public expense.

The starting point for the report is true enough - that Hong Kong has an ageing population and one that is growing only slowly. This has been known long enough. The government has been aware that years of having a very low fertility rate has been a major factor in ageing - but has done nothing to address it.

The document goes on to present a scare story of ever rising deficits caused by a stagnating workforce and rising demands for health and welfare spending. Yet it accompanies this with projections for sustained increases in capital works. The non sequitur is backed by references to guidelines laid down by Philip Haddon-Cave in the 1970s - that public spending should be no more than 20 per cent of gross domestic product, and that there should be a significant surplus on the operating budget to provide funds for capital works (in addition to capital works paid by capital revenue).

Haddon-Cave, a realist, not an ideologue, would be appalled by official inability to see what has changed. Then, Hong Kong had a young, fast-growing workforce and the need for more infrastructure to support an economy based on manufacturing and merchandise trade. Today, we have no manufacturing, a port which is past its peak, and financial and other high-value services whose input needs are not primarily related to concrete.

Determination to rig the fiscal system to support mega infrastructure projects is further underlined by the report’s curt dismissal of the widely supported proposal to shift part of land revenues from capital to recurrent income. This would cause short-term reductions in revenue but long-term gains in stability. But it would not suit the vested interests who are dedicated to wasteful spending on roads and bridges as well as businesses whose profits rely on land price inflation.

Notions of economic return on capital are now alien to the bureaucracy.

The document also perpetuates a convenient official lie: that the HK$750 billion surplus of the Monetary Authority is not part of the reserves. It ignores these assets completely, suggesting the group is so ignorant of exchange rate mechanisms that it believes these are needed to defend a currency peg.

The fact is that the HK$1.5 trillion total reserves belong to the citizens and were accumulated by the government at their expense. There is a moral obligation to return some of these savings to those who earned them as they reach an age when they can no longer work. Pensions are not just a right of civil servants.

Yet, while drawing almost straight-line charts of health and welfare costs, the report takes no account of the future role of the Mandatory Provident Fund - a scheme that is inadequate and expensive but nonetheless will have an impact on retirement incomes in the future.

Nor does the report take proper account of the potential for increased workforce participation. This is not surprising, given that government bodies still adhere to retirement at 60. But if the group cared to look at official data, it would have seen that in the past four years, GDP rises have owed much to the rise in participation by those over 45 - from 64.7 per cent to 68 per cent for those 45-64; and from 5.7 per cent to 8.1 per cent for those over 65. This trend is sure to continue as most people need to work after 60.

There is nothing sacrosanct about limiting public expenditure to 20 per cent of GDP. And even assuming there is abundant reason to privatise some public trading activities and impose genuine user-pays charges on others, a government incapable of adjusting tunnel tolls for car owners but that begrudges spending on the old and infirm is contemptible.

Of course, Hong Kong must adjust to changing demography as well as a changing economic base. But that demands that it focuses on providing health, education, security and similar services and transfer payments to the old and sick - and assigns much of the capital works to entities required to be self-financing and thus subject to the discipline of the market. The government owns far too many assets already.

For sure, the tax system is too narrowly based. But this report suggests nothing major to change that.

The report is basically a public relations exercise to protect the status quo. That is not surprising as it was written by officials with inputs from academic economists and accountants (specialists in tax avoidance). Where were the entrepreneurs, the demographers, the fiscal policy experts, the investment bankers, let alone the representatives of low-income groups?

John Tsang Chun-wah has shown yet again he is incapable of new thinking, to advance policies that accept welfare responsibilities ungrudgingly and improve the currently abysmal returns on public investment.

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