Hong Kong’s Rainy Future Fund now accounts for the largest share of the city’s dwindling reserves, prompting experts to call for caution.

“The Future Fund is like emergency food for a hiker lost on Mount Everest. Once it’s used up, there’s nothing left,” said economist Simon Lee Siupo, co-director of international business at the Chinese University of Hong Kong. said. and the China Enterprise Program.

“Hong Kong’s economy is currently in trouble and needs to find a way out. We need to use this fund very carefully or we will be at risk.”

The city’s reserves are estimated at a 10-year low of HK$780 billion (US$99.7 billion) in 2023-2024, with operating reserves in the general revenue account, seven earmarked funds, and an estimated It is made up of a HK$354.7 billion Future Fund.

The fund is set aside for long-term investments to ensure higher returns and consists of an initial fund of HK$219.7 billion from the City’s Land Fund and regular replenishment from budget surpluses.

In 2019, it accounted for less than 20% of the city’s reserves, but that proportion is expected to rise to nearly 40% by 2023, and account for almost half this year.

Operating reserves declined from nearly 60% to less than 20% during the same period due to shrinking government revenues and increased spending.

Finance Secretary Paul Chan Mopo announced in his 2021-22 Budget that the Future Fund’s cumulative investment income will be transferred back to the operating accounts as investment income on a “progressive basis”.

That year and the following year, HK$25 billion and HK$35 billion were returned, respectively.

In his weekly blog on Sunday, Mr Chan said the government would use limited resources more intensively and efficiently.

“We expect the economy to improve gradually this year, and we expect the business environment in all sectors to continue to improve,” he added.

Officials say the pink color symbolizes morning sunshine and optimism about the future, which is why it was chosen for the cover of Wednesday’s budget briefing.

“The colors on this year’s budget cover reflect those hopes,” Chan wrote.

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Economists said that even if the seed money remains untouched and could be legally disputed, the use of investment proceeds means the future fund is already unlocked. They called for caution or for the city to devise spending rules, as other jurisdictions with endowments have done, including Singapore, Canada’s Alberta and Norway.

“Strictly speaking, the fund has been unlocked, but only the profits have been taken out,” said Professor Liu Park-wei, a former government advisor who recommended the Treasury Secretary establish the Future Fund 10 years ago.

“Now that the rainy day has finally come, it is time for the Future Fund to function…However, given the lack of fiscal surplus over the past few years, the Fund was not able to grow as much as we had hoped, so the government You need to pay close attention to replenishing the fund. ”

So far, the fund has only been allocated one additional boost of HK$4.8 billion, about a third of its 2015-2016 surplus.

The city is expected to record a budget deficit for the fourth time in the past five years, excluding the 2019-20 fiscal year. The shortfall is expected to grow to more than HK$100 billion in 2023-24, far higher than the HK$54 billion originally forecast.

Established in 2016, the Future Fund was recommended by the Working Group on Long-Term Fiscal Planning, which was appointed by the Finance Secretary in 2014, when Hong Kong had been enjoying more than a decade of consecutive fiscal surpluses.

Advisors said the city needs to act early to manage its finances in a sustainable manner because of the burden of an aging population.

Although the Monetary Authority of Japan (HKMA) invests the majority of the Fund, the Treasurer has also adopted a more targeted and ambitious investment approach in recent years by putting HK$32 billion from the Fund into the Hong Kong Growth Portfolio. are doing.

The purpose of the Growth Portfolio is to invest in companies, projects or funds that can benefit the urban economy and generate appropriate risk-adjusted returns.

A further HK$10 billion was also withdrawn, half of which was used to establish the Greater Bay Area Investment Fund and the other half to establish the Strategic Technology Fund to invest in medium-term IT start-ups. Hong Kong Investment Corporation (HKIC) manages his three funds.

Mr Chan also set aside HK$30 billion from the Future Fund in 2022 to establish a co-investment fund to provide incentives to companies with strategic value to set up operations in the city.

He also transferred HK$27.3 billion from the fund in 2020 to invest in Cathay Pacific Airways as a lifeline to maintain the city’s aviation hub status during the pandemic.

An HKMA spokesperson said the portion controlled by the authority was deposited in an exchange fund, with compound returns of 17.8% and -3% in 2021 and 2022, respectively. Figures for 2023 will be disclosed in the annual report at a later date.

According to the Financial Services and Treasury Department, it recorded its highest revenue of HK$58.56 billion in 2021 as of Dec. 31. It added that its worst performance was a loss of HK$9 billion in 2022, with a dividend income of HK$1.52. $1 billion from Cathay Pacific in 2023.

Annual investment income from the land fund in the past three years has ranged from HK$37.68 billion to about HK$49 billion, according to budget documents.

A spokesperson for HKIC did not disclose the investment returns of the three funds it manages. She said she would “adopt a long-term, multidimensional perspective to evaluate a company’s performance.”

“The government needs to set guidelines on how much can be taken out of the fund to ensure discipline,” Lee added. “If I incur a loss on my investment in a year like 2022, will I still be able to withdraw my money?”

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He said further disclosure of the fund’s investment structure is needed to help the public better understand the fund’s performance and avoid unnecessary speculation.

Investment income from the fund will be held for reinvestment by an exchange fund used for the defense of the city’s currency until December 2030, or a date selected by the Treasurer, according to budget documents.

Mr. Liu said authorities should only inject money into the Future Fund when fiscal reserves have fallen to a level where they can cover less than six months of government spending.

“Tax revenues typically come in the second half of the year, so the government needs cash flow equivalent to about six months’ worth of spending in the first half of the year,” he said.

The estimated fiscal reserves for 2023-2024 correspond to less than 12 months of expenditure.

Liu said the government could consider increasing bond issuance for infrastructure development, as well as spending cuts, before pumping money into the fund. But he said spending limits were unnecessary as governments should always be cautious.

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The Singapore government is limited by a spending limit of 50 per cent of annual investment returns from reserves.

Norway and Alberta also have reserves, and annual withdrawals cannot exceed real investment returns.

The Land Fund, a key component of the Future Fund, was established in Hong Kong on 1 July 1997. The government must seek approval from the Legislative Council to withdraw funds.

Then-Treasury Secretary Henry Tan Ying Yen withdrew HK$120 billion in 2003-2004 and HK$40 billion in 2004-2005 to deal with cash flow shortfalls after a deficit caused by the Severe Acute Respiratory Syndrome outbreak. Approved.

A department spokeswoman did not comment on the need for approval to use the fund’s proceeds.

Additional reporting by Jess Ma