Saturday, December 17, 2016

Hong Kong’s curious capital flows the result of laundering

For all that we have extremely severe laws against money laundering, the city’s economy depends on it. 

We start today with a tale of two cities, Hong Kong and Bangkok. As in Charles Dickens’ original story of that name, this is about people fleeing, but for their money rather than their lives.

Hong Kong first. Look at the two lines that swing sharply up and down in the first chart. These represent total annual capital inflows and outflows as a percentage of gross domestic product and two things immediately stand out.

The first is that the two are almost exactly matched, which poses a question. How does it happen that foreigners are always investing or disinvesting exactly as much money in Hong Kong as Hong Kong people are investing or disinvesting abroad? This is a very unusual coincidence.

The second obvious feature of the chart is the scale of these flows. Three times over the last 10 years both Hong Kong’s annual inflow and its outflow of capital exceeded HK$2 trillion, which is more than 100 per cent of GDP. This is a ridiculously improbable figure.

And now for contrast to Bangkok, or rather all of Thailand but in financial affairs this means Bangkok. The two other lines across the chart, which closely track the horizontal zero line, represent capital inflows and outflows in Thailand. They are an order of magnitude less. This is the common experience across the world.

Notice also from the second chart, which shows only the Thailand figures, that these inflows and outflows are not exactly matched as they are in Hong Kong. There are indications of general disinvestment in 2008, a common worldwide feature of that year but foreign and Thai investors otherwise went their independent ways. Once again, this is the normal experience.

There is a simple explanation for Hong Kong’s curious capital flows. This town lives by money laundering. For all that we have extremely severe laws against it, our economy depends on it.

When money wants in or out of the mainland it comes through us in tsunami-like quantities. We then wash it and send it onwards again, nice and clean. Sometimes it wants into the mainland (but labelled as foreign investment) and sometimes, such as recently, it wants out. Either way we’ll clean it up and send it on.

It’s not supposed to be like that. Foreign investment in Hong Kong is meant to be just that, money invested in Hong Kong, and it is blithely declared as such. But the figures belie the declaration when inward direct investment alone is more than twice the value of fixed capital formation.

Thus when “analysts” start to make warning noises about impending capital outflow, your best response is, “Fantastic. What wonderful news.”

Because it truly is.

We don’t care whether it’s inflow or outflow as long as it’s big flow. That’s how our laundry shop makes its money.



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