Hong Kong's Exchange Fund posts US$8.7 billion gain amid stock market rally

Hong Kong's Exchange Fund, the war chest used to defend the local currency, reported an investment gain of HK$67.2 billion (US$8.7 billion) in the first quarter, thanks to stock market rallies in the city and overseas.
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In the year-earlier period, the fund posted a gain of HK$62.3 billion, though in the final quarter of 2024, it recorded a loss of HK$20.1 billion, according to data from
the Hong Kong Monetary Authority (HKMA) on Tuesday.
Over the course of the quarter, the benchmark Hang Seng Index rose 15 per cent as Chinese stocks soared after artificial intelligence start-up DeepSeek rolled out its low-cost, high-performance models.
The Exchange Fund, however, was expected to face a number of uncertainties for the rest of the year, after the US' tariff policies triggered market turmoil in April.
'The US tariff policy has created a lot of market uncertainties since early April, but we continue to see capital inflow to Hong Kong stock markets for the many upcoming new listings,' said the de facto central bank's chief executive, Eddie Yue Wai-man, during his quarterly meeting with lawmakers on Tuesday.
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The fund's total assets stood at HK$3.98 trillion at the end of March, a HK$46 billion decrease from the end of last year.

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3 hours ago

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Hong Kong banks take Fed's lead, maintain prime rates

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Asia Times

15 hours ago

• Asia Times

China's industrial policy has an unprofitability problem

Analyzing American economic policy isn't that interesting these days, except perhaps as a grim spectacle. So I've been thinking a little about Chinese economic policy. China's leaders leave much to be desired, but to their credit, they still think economic policy is about strengthening their nation, enriching their people and improving their technology instead of pursuing domestic culture wars by other means. Anyway, China has a lot of policy initiatives right now — cleaning up the fallout from the real estate bust, retaliating against America's tariffs, improving their health care system, and so on. But their most important policy — and the one everyone talks about here in the US — is their big industrial policy push. If you want to understand Chinese industrial policy, I recommend starting with Barry Naughton's free book, 'The Rise of China's Industrial Policy: 1978 to 2020.' The basic story is that until the mid-to-late 2000s, China didn't have a national industrial policy as such. It had a bunch of local governments trying to build up specific industries, usually by attracting investment from multinational companies. And it had a central government that tried to make it easy for local governments to do that, using macro policies like making sure coal was cheap, holding down the value of the Chinese currency in order to stimulate exports and so on. But it was not until the end of Hu Jintao's term in office — and really, not until Xi Jinping came to power — that China developed a national industrial policy, in which the government tries to promote specific industries using tools like subsidies and cheap bank loans. If you want a good primer on just how big those loans and subsidies are, and which industries they're going to, I recommend CSIS' 2022 report, 'Red Ink: Estimating Chinese Industrial Policy Spending in Comparative Perspective.' It's a lot. Here are the authors' estimates from 2019: Source: CSIS In some respects, this policy was successful. For example, it moved China up the value chain — instead of doing simple low-value assembly for foreign manufacturers as in the 2000s, China in the 2010s learned to make many of the higher-value components that go into things like computers, phones and cars, as well as many of the tools that create those goods. This had the added security benefit of making China less dependent on foreign rivals for key manufacturing inputs. China has doubled down on its centralized, big-spending industrial policy since then. In 2021-22, China suffered a huge real estate bust, crippling a sector that had accounted for almost one-third of the country's GDP. China's leaders responded by doubling down on manufacturing, encouraging banks — essentially all of which are either state-owned or state-controlled — to shift their lending from real estate to industry. In 2023, you saw charts like this: Source: Shanghai Macro via Bert Hofman Along with this industrial policy, you saw a massive surge of Chinese-manufactured exports flowing out to the rest of the world. The most recent export surge has been labeled the 'Second China Shock', but in fact, the trend was already headed in that direction well before the pandemic: Source: CSIS China's competitive success in manufacturing industry after industry has been nothing short of spectacular. In just a couple of years, China went from a footnote in the global car industry to the world's leading auto exporter: Source: Visual Capitalist Obviously, this export surge is the most important way that people in countries like the US experience the results of China's industrial policy. So most commentary on the policy has focused on exports, trade balances and so on. But it's important to remember that most of what China is producing in this epic manufacturing surge is not being exported. For example, take cars. Even though China is now the world's top car exporter, most of the cars it makes are sold within China: Source: Brad Setser China's auto industry is actually unusually domestically focused, compared to other auto powerhouses like Germany, South Korea, and Japan: Source: Bloomberg via Noahopinion In fact, this pattern holds across the whole economy. For an industrialized country, China is unusually insular — its exports as a percent of its GDP are higher than the US, but much lower than France, the UK, Germany, or South Korea: Source: World Bank Most of China's enormous manufacturing subsidies are not actually for export manufacturing; they're for domestic manufacturing. The rest of the world is just getting a little bit of spillover from whatever Chinese companies can't manage to sell domestically — except for a country as huge as China, a 'little spillover' can seem like a massive flood to everyone else. And here lies the rub. Essentially, China is huge and most of its trading partners are pretty small. There's a limited amount of Chinese cars, semiconductors, electronics, robots, machine tools, ships, solar panels, and batteries they can buy. And on top of that, some of China's biggest trading partners are levying tariffs against it. For most Chinese manufacturers, export markets are simply not going to replace the domestic market. And this means that Chinese manufacturers will be forced to compete against each other for a domestic market whose size is relatively fixed, at least in the short term. That competition will eat away at their profit margins. In fact, this is already happening. Vicious price wars have broken out in the Chinese auto industry, and even the country's top carmakers are under extreme pressure: Chinese carmakers' price war is putting the industry's balance sheet under strain…Current liabilities exceeded current assets at more than a third of publicly listed car manufacturers at the end of last year…China's leading carmakers are being forced to…fight for market share amid heavy [price] discounting… The dominant electric-vehicle maker BYD is deepest in negative territory with its working capital, followed by rivals Geely, Nio, Seres and state-backed BAIC and JAC, while the total net current assets of 16 major listed Chinese carmakers [saw] a 62 per cent decline from…the first half of 2021… 'Given the current downward trend, China's auto industry is expected to enter an industry-wide elimination phase . . . in 2026 at the latest,' [an analyst] warned. 'During the process, some companies will die of liquidity crises.'… BYD recently came under pressure to defend its financial numbers and business practices after Wei Jianjun, chair of rival Great Wall Motor, called for a comprehensive audit of all major domestic carmakers…'An Evergrande exists in [China's] auto sector at the moment — it just hasn't blown up,' he told local media, raising the spectre of the industry following the property sector into a spiralling debt crisis. How can these mighty world-conquering automakers be skating on the edge of bankruptcy when the government is pouring so many subsidies and cheap loans into the auto industry? The answer is simple: China's government is paying its car companies to compete each other to death. The Chinese government pays a ton of different car companies to make more cars. Chinese banks, at the government's behest, give cheap loans to a bunch of different car companies to make more cars. So they all make more cars — more than Chinese consumers want to buy. So they try to sell some of the extra cars overseas, but foreigners only buy a modest amount of them. Now what? Unsold cars pile up, prices are cut and cut again, and all the car companies — even the best ones, like BYD — see their profit margins fall and fall. It's not just autos, either — similar things are happening in solar, steel, and a bunch of other industries. Manufacturing profit margins are plunging across China's entire economy: Source: Bloomberg via Noahopinion A Chinese buzzword for this sort of excessive competition is 'involution.' Why is this bad, though? Who cares about profit, anyway? After all, China's workers are getting jobs, and China's consumers are getting a ton of cheap cars and other manufactured stuff. So what if rich BYD shareholders and corporate executives take a loss? Well, in fact, there are several problems. The first is macroeconomic. Price wars across much of the economy create deflation. In fact, China is already experiencing deflation: China's consumer prices fell for a fourth consecutive month in May…with price wars in the auto sector adding to downward pressure…The consumer price index fell 0.1% from a year earlier…CPI slipped into negative territory in February, falling 0.7% from a year ago, and has continued to post year-on-year declines of 0.1% in March, April, and now May…Separately, deflation in the country's factory-gate or producer prices deepened, falling 3.3% from a year earlier in May[.] A lot of this is probably due to weak demand from the ongoing real estate bust, but price wars prompted by industrial policy will make it worse. Deflation will exacerbate the lingering problems from the real estate implosion. Debts are in nominal terms, meaning that when prices go down, those debts become harder to service. More of the debts go bad, and banks get weaker — all those bad loans on their books make them less willing to make new loans. Consumer debts get more onerous too, making consumers less willing to spend (and consumers, unlike banks, are not government-controlled). This effect is called debt deflation. On top of that, a massive wave of bankruptcies could cause a second bad-debt crisis on top of the one that's already happening from real estate. Wei Jianjun of Great Wall Motor has been warning of exactly this happening. In fact, we can already see Chinese banks beginning to slow the torrid pace of industrial loans they were dishing out a couple of years ago: Source: Bloomberg via Noahopinion All of this could extend China's growth slowdown for years. There are also microeconomic dangers from overcompetition. Competition could spur Chinese companies to just innovate harder. But if China's top manufacturers are constantly skating on the edge of bankruptcy, that means they'll have fewer resources to invest in long-term projects like technological innovation and new business models. Basically, prices are signals about what to build, and China's industrial policies are sending strong signals of 'build more stuff today' instead of 'build better stuff tomorrow.' There's also the danger that China's government won't allow the price wars to end. Ideally, you'd want these price wars to be temporary; eventually, you'd want weak producers to fail, allowing top producers to increase their profitability. This good outcome relies on the government eventually cutting subsidies and letting bad companies die. But letting bad companies die means a bunch of people get laid off. Bloomberg recently had a good report about the political pressures on the Chinese government to keep the subsidies flowing: Local leaders laden in debt are rolling out tax breaks and subsidies for companies, in a bid to stave off the double whammy of job and revenue losses…For China's top leaders, employment is an even more politically sensitive issue than economic growth, according to Neil Thomas, a fellow for Chinese politics at the Asia Society Policy Institute's Center for China Analysis…Already there are signs the weakening labor market is becoming a touchy subject: One of China's largest online recruitment platforms Zhaopin Ltd. this year quietly stopped providing wage data it's compiled for at least a decade. Already, Bloomberg reports that economic protests are proliferating across the country; with the real estate crisis ongoing, the government will be under even more political pressure to keep manufacturing employment strong. This could mean keeping crappy companies on life support. These so-called 'zombie' companies, kept alive only by a never-ending flood of cheap credit, were a big part of why Japan's economy slowed down so much in the 1990s. So this is the scenario where China's industrial policy ends up backfiring. Subsidies and cheap bank loans dished out to high-quality and low-quality companies alike could flood the market with undesired product, spurring vicious cutthroat price wars, destroying profit margins, exacerbating deflation, and generally making the macroeconomic situation worse. And then China's government could double down by trying to protect employment, by never halting subsidies for companies that fail. Usually, when we think of the costs of industrial policy, the main thing we think about is waste, and there is certainly plenty of waste in China's current approach. But China's experience is illuminating a second problem with industrial policy — the risk of vicious price wars and deflation due to the subsidization of too many competing companies. This article was first published on Noah Smith's Noahpinion Substack and is republished with kind permission. Become a Noahopinion subscriber here.

HKFP

17 hours ago

• HKFP

Explainer: What to know about Hong Kong taxi licences, and why their value is plummeting amid rise of Uber

The value of Hong Kong taxi licences has plummeted to a record low in recent weeks, now costing less than HK$2 million – less than a quarter of the value at their peak value. Some taxi industry bigwigs have suggested that the government could buy back the licences to offset the losses that license holders are experiencing. But what are taxi licences, who owns them, and how do they fit into the bigger picture of the industry's war against ride-hailing apps like Uber? HKFP explores the topic. What is a taxi licence? Taxi licences are synonymous with cab ownership in Hong Kong, as all taxi owners must possess a licence. They began to be issued by the government via public tender in 1964, during the British colonial era, and are now bought and sold freely on the market. There are a total of 18,163 taxi licences in the city, of which 15,250 are for urban taxis, 2,838 for New Territories taxis, and 75 for Lantau taxis. The number of licences for urban and New Territories taxis has been stagnant since 1994, the last time there was a public tender for them. In 2016, the government held a public tender for 25 Lantau taxi licences. Licences are bought like property: a buyer pays a down payment and then takes out a bank loan, repaying it in monthly instalments over years or decades. Take for example, cab driver Nigel Chan. He bought a taxi licence in August, he told HKFP, because he likes the flexibility of being able to drive whenever he wants, as opposed to renting a taxi and having to work specific hours. In addition to a down payment of HK$1 million, Chan has to pay an almost HK$10,000 monthly instalment for 25 years. The licences are permanent. Licence owners must pay an annual vehicle licence fee of HK$3,159 to the Transport Department. Who owns taxi licences in Hong Kong? Just like property and businesses, both individuals and companies can own taxi licences. As of the end of January 2024, about 59 per cent of taxi licences are held by individuals, while the rest are owned by companies. According to 2022 figures from the Transport Department, the top three companies holding the most taxi licences are Tai Wo Motors, Hung Yat Motors, and Chung Shing Taxi. They are also among Hong Kong's largest taxi companies that lease vehicles to cabbies. Tai Wo, Hung Yat, and Chung Shing have 603, 309, and 259 licences respectively. Tai Wo and Chung Shing are two of the five companies that successfully bid for the government's taxi fleet licences to launch a line of premium cabs. How are taxi licences a form of investment? Taxi licences are considered an investment tool. Cab companies that sell these licences tout the fixed number of licences, saying investors need not worry about an increase in taxis eroding investment value. Taxi licence holders can earn a monthly income by renting their vehicles to drivers. Licence owners can either find drivers themselves or pay agents or taxi firms to help lease their vehicles. How has the value of taxi licences changed over the years? The value of urban taxi licences – the most expensive of the three types – was HK$6.7 million at the start of 2015, according to a Legislative Council paper. But the value of urban taxi licences has plunged by as much as 57 per cent over the past 10 years, falling to HK$2.85 million at the end of 2024. The market price has continued plummeting this year, with an especially steep fall in May. The value reached HK$1.97 million this week. What's the reason for the nosedive? The fall in the value of taxi licences is largely attributed to the rising popularity of ride-hailing apps such as Uber, which arrived in Hong Kong in 2014. Ride-hailing apps operate in a grey area in the city, which requires vehicles offering rides to have a hire car permit. However, while drivers have been arrested, police have not conducted any major crackdowns. Drivers and customers have few issues offering or using ride-hailing services. Benson Hung, a lecturer at the Vocational Training Council who has researched the cab industry, said taxi licences were once seen as a good investment. Before Uber and other ride-hailing apps entered Hong Kong, the competition was only among cabbies, whose number was limited by the cap on taxi licences. 'There was a scarcity of resources. There was a limited supply of [point-to-point] drivers, so the value increased,' he told HKFP in Cantonese. While some taxi drivers are not opposed to ride-hailing apps, saying they provide an extra income stream as apps like Uber also allow customers to call taxis, it is taxi owners who paid millions for their licences that have the most to lose, Hung said. Increasingly, taxi licence holders might see reduced monthly returns because some taxi drivers may stop renting taxis, seeing their jobs as no longer lucrative. This would make taxi licence ownership less attractive, he explained. How has the taxi trade responded to the popularity of ride-hailing apps? The taxi trade has long urged the government to crack down on ride-hailing vehicles, calling them a threat to the industry. Chow Kwok-keung, chairperson of the Hong Kong Taxi and Public Light Bus Association, which represents taxi owners' interests, said in May that over 75 per cent of taxi owners had fallen into debt due to the impact of ride-hailing services. The government said in July that it would regulate ride-hailing platforms, for example, by introducing a new licensing system, and would announce legislative proposals within this year. However, no progress has been publicised. Amid the falling value of licences, industry bigwigs have suggested the government buy back licences. Cheng Hak-wo, chairperson of the Taxi Dealers and Owners Association and founder of Chung Shing Taxi, said in June that the government was partly responsible for the plunging value because it had turned a blind eye to ride-hailing apps. Therefore, authorities have the responsibility to protect licence holders, he argued. Lawmakers, however, have not lobbied behind the suggestion. Legislator Doreen Kong told HKFP that it depended on the 'economic environment' and whether the government had the ability to do so. 'I think the issue of taxis and ride-hailing apps needs to be looked at as a whole,' she said. 'When the government releases the framework [for regulating ride-hailing apps], then I can comment more.' In response to a reporter's question, Chief Executive John Lee said on June 10 that any decision relating to the use of public funds must be made with caution. He added that the framework the government was working on to regulate ride-hailing apps would also support the development of the taxi trade and raise the standards of taxi service.