Paul Chan: Navigating change in Hong Kong’s role

As the third year of his tenure as Hong Kong’s financial secretary stretches out in front of him, Paul Chan Man-po will hope to see out the remainder of this one without putting his fiscal foot in his mouth.

Despite coming in fifth this year in our assessment of finance ministers around the region, it’s not been a faultless performance.

Since being appointed finance chief in January 2017, the 63-year-old former president of the Hong Kong Institute of Certified Public Accountants has been plagued by a series of very public scandals – from libel accusations to allegations of dodgy land deals – not directly linked to his work as Hong Kong’s head honcho for finance.

That changed several months ago when a clean slate, at least as far as his day job was concerned, became sullied over a botched plan to give a HK$4,000 ($510) cash handout to more than 2 million of the city’s 7.3 million population.

The handout – considered by many to be a clumsy and populist fiscal instrument – will go ahead at some point later this year but only after ructions over red tape forced Chan into a public apology over the measure, which will likely cost the taxpayer more than HK$11 billion.

Mind you, it’s not like Hong Kong cannot afford to splash the cash.

In its latest credit opinion, Moody’s continued to set the Special Administrative Region of China’s fiscal strength score at “very high”, citing its very low government debt level of less than 5% of GDP.

Hong Kong’s ability to weather the twin threats of an aging population and external geopolitical shocks – especially due to the city’s increasingly intertwined relationship with mainland China and the Sino-US trade war uncertainty that brings – is also bolstered by its strong fundamentals.

“With a GDP per capita of more than $55,000 in purchasing power parity terms, households have significant capacity to absorb economic shocks,’ Moody’s said.

These concerns were highlighted in Chan’s second budget, which he delivered at the end of February.

His budget speech message was clear: in a volatile and unpredictable world buffeted by a superpower trade war, shrinking economic growth and a beast called Brexit, this was a finance chief who wasn’t taking any fiscal chances – at least for the foreseeable future.

As a result, the numbers that Chan crunched can best be described as modest on the back of weaker-than-expected economic growth of 3% for the whole of 2018, slipping to 1.3% in the fourth quarter of the fiscal year.

While Chan did announce significant cash injections to boost technological innovation, help find a cure for Hong Kong’s sick healthcare system and give some relief to its burgeoning elderly population – not to mention a HK$600 million clean-up of the city’s crumbling public toilets – he was constrained by having a smaller pile of cash to spend than in his maiden budget last year.

The finance chief said that the fiscal surplus available this year was HK$58.7 billion, significantly down on the HK$149 billion of last year due to the aforementioned trade war and a cooling property market which punched a hole in land sales and stamp duty revenues. Nevertheless, the surplus figure surpassed Chan’s original estimate of HK$46.6 billion.

Still, concerns do persist over a slowing economy and what some perceive to be an erosion of the city’s autonomy under the “One country, two systems’’ principle and creeping efforts to integrate Hong Kong into the so-called “Greater Bay Area’’ of southern China.

GDP growth is predicted to drop to 2.3% in this year from 2.9% in 2018 as a slowdown in mainland China, a declining property market and international trade tensions weigh on economic activity.

In a recent speech, however, Chan was bullish on the future, citing the growing role of private equity to Hong Kong’s asset and wealth management landscape.

He also pinpointed Hong Kong’s role in China’s much-vaunted Belt and Road initiative. “Given our liquid capital flow and deep pool of financial talent, Hong Kong is the natural centre from which to raise funds for infrastructure, investment and production projects,” he said.

Despite concerns about interference in the city’s affairs by Beijing and nagging worries that Hong Kong could become “just another city in China”, the central government-driven push for integration across the Greater Bay Area is seen as an opportunity – and a potential shelter from economic storms – by the IMF.