The Financial Situation in Hong Kong

Thailand, Malaysia, Indonesia, Korea all faced financial difficulties in the late 90's, and have to call IMF (International Monetary Fund) for help, and many banks collapsed or been taken over by Government. Hong Kong had not asked IMF for help, and the banks did not collapse. This essay try to ascertain the real situation.
Some knowledge in book-keeping and Bank's credit system are assumed, which may be acquired by reading "Book-keeping for Shopowners" , and "Money and Central Bank" in this web site.

Answers are my own view, and it may be wrong. I would be very grateful if you would point out my mistakes to me.

Question: Suppose Bank A makes a loan of $1000 to B. What is the book-keeping entries in Bank A ?

Answer :

Debit Loan to B Account with 1000
Credit B deposit Account with 1000
Hence a loan is nothing but 2 entries in the books.

Question: When interest is charged on the loan account, say 10% (i.e. interest = 100), what is the book-keeping entries in Bank A ?

Answer :

Debit Loan to B Account with 100
Credit Interest Receivable Account with 100

Question: Suppose B spent all his borrowed money on a foreign car, and signed a cheque of $1000 to the car dealer who deposits the cheque with his own banker, say Foreign_Bank. What is the book-keeping entries in Bank A ?

Answer :

Debit B deposit Account with 1000
Credit Foreign_Bank with 1000

Question : Suppose banks in Hong Kong are bent on increasing money supply, i.e. increase the loan by a fixed percentage each year, (= increase of IOU). And the borrowers spent ALL the money on foreign goods. What will be shown in the account books of local banks ?

Answer: The loan account on the debit side will be very great, and the deposit account by Foreign_bank will be equally great too. (Originally, the deposit by borrowers Account on the credit side will be great. But as the borrowers spent their money on foreign imports, the deposit by Foreign Banks on the credit side will be great instead.)

Now take a look at the extracts from the Annual Reports published by the Government of Hong Kong on banks. Only the important items on the debit side (asset) and credit side (liabilities) are shown. The figures are in millions of Hong Kong dollars.

(Amount in millions HK dollar)
                                 1994        1995        1996       1997       1998

Deposit by local institutions   543010      552079      568451     553145     454803   

Deposit by banks abroad        3992219     4161120     3838497    3887610    2736958   
Less deposits to banks abroad  2544713     2436674     2129195    2232887    2251121 
                               -------     -------     -------    -------    -------
  Net debt to foreign banks    1447506     1724446     1709302    1654723     485837

Deposit by local               1884331     2153009     2374887    2597994    2908496   

Loan                           3101237     3552880     3706286    3875883    3088255   

Question : How much money do banks in Hong Kong owe to foreign banks in the years 1994, 1995, 1996, 1997, 1998? There is a sudden drop from 1654723 millions in 1997 to 485837 millions in 1998, what is the reason ?

Answer : The drop is because the banks became cautious because of the failure of banks in Thailand, Malaysia, Indonesia and Korea, and called back some loans to customers, many of which are from the industry. Hence we see there is a sharp drop in loan from 3875883 million in 1997 to 3088255 million in 1998. In fact, the industry borrowers paid back the money to the foreign banks.

Question : Assuming interest rate at the money market to be 6 % for long term loan, how much interest is Hong Kong paying to the Foreign banks in 1994 , ... ?

Answer : In 1994, interest = 1447506 * 6 % = 86850 millions ,...

Question : In Thailand, Indonesia, Malaysia, Korea, the loan is comparable to that in Hong Kong, hence the interest payment is roughly the same. Assuming that Thailand also has to pay 86850 million Hong Kong dollars as interest, how much would that be in terms of weight of rice (suppose Thailand exports 1 pound of rice for 2.5 Hong Kong dollars)?

Answer : 86850 * 10^6 / 2.5 pounds = 34,740,000,000 pounds of rice.

Question : Try to find annual reports of Hong Kong in the 80's, and find out the loan figure then. Why has there been dramatic increase in loan (i.e. money supply) ?

Answer : Because of liberalization of banks and financial institutions in the 80's, many foreign banks came to Hong Kong. Lending is nothing but increase of IOU (credit system) and 2 entries in the account books, nothing physical takes place.
Because a bank's profit is tied to the amount of loan it makes (provided the loans do not become bad-debt and irrecoverable !), banks became greedy and increased their loan. Also Government did nothing to guide the bankers (one thing Hong Kong Government did was restrict mortgage to houses to 70%, which was a prudent move highly to be praised.)

Question : if you were a foreign banker, and held tremendous deposit in Hong Kong dollars in Hong Kong banks, and if you hear rumours of devaluation of Hong Kong dollars, what will you do?

Question : you will probably change all Hong Kong dollars deposit to USA money, or some European money through immediate exchange or future contracts.

Question : if you further fear that some Hong Kong banks will fail, what will you do ?

Answer : ask the IMF (International Monetary Fund) to intervene, so that you get back your deposit, and the Hong Kong banks owe the IMF instead of owing to you.

Question : assuming that IMF lends money to Hong Kong, and banks in Hong Kong fail, would the Hong Kong Government take over the debt ?

Answer : Hong Kong Government must take over the debt itself, and take over the debt from IMF to repay for the Hong Kong banks. Hence the imprudence of the banks (in fact, the directors and shareholders gained a lot during the good years) have to be borne by all citizens of Hong Kong. The situation in Indonesia, Thailand, Malaysia, Korea are the same. The Governments took over all the debt, and the tax-payers will have to pay in the future. Governments cannot escape this responsibility.

Question : Thailand, Malaysia, Indonesia and Korea also owe foreign banks tremendous money. What are the causes?

Answer : I think there are several reasons, the first is that Asia countries really cannot afford expensive foreign goods. Many Asia countries produce goods of low value, whereas an Intel chip can cost thousands of US$. A copy of Microsoft Disk Operating System is more than what many can earn in a month in Thailand. I really think that Asia countries should develop their own software : an Operating System is not really that difficult to write, and poor countries can save tremendous money. A day's stay in an USA hotel by a Thai person may cost his year's wages. But an American can spend his 1 month's salary luxuriously in Thailand for a year !

Secondly, there are no teaching priests in those countries to teach the population not to be greedy for unjust gains. Whole population in Hong Kong flocked to buy shares. Many such shares are bought by foreign fund managers at very low price years before, and the fund managers, as soon as they saw an exponential increase in demand and hence exponential increase in prices, dumped their shares. The greedy but ignorant mass bought those shares. Thus foreign fund managers earned tremendous returns for their investments. In fact, as one wise Hong Kong legislator has said before "Hong Kong has become a big casino", but the winners are foreign fund managers.

Also many such countries do not use their money wisely. Malaysia built high rise buildings comparable to those of USA, and many bridges. Indonesia too. Hence they are spending more than they earn.

Question : If you are a foreign banker, and you know that banks in Thailand, Malaysia, ... owe you tremendous money, and that their money floats in the market, what will you do?

Answer : In all probabilities, the foreigner bankers will not buy that currency, and hence it will be devaluated to an extremely low level.

Question : When the currency devaluates, what will be the interest rate in the money market there? Find out the interest rates in Thailand, Malaysia, Indonesia, Korea after devaluation.

Answer : I lack data. But I heard one Korean trader say that interest rate rose to 25%. I also know that interest rate in Philippine rose to very high level after similar financial difficulties. I also do not know what policy the Central banks in those countries take.

Question : Why do the foreign banks not press for IMF intervention in Hong Kong ?

Answer: It is because Hong Kong Government firmly peg Hong Kong dollars to US$ and the interest rate in the money market in Hong Kong is some 0.5 percent higher than those in USA.

Question : Can Hong Kong government forsake the peg, and allow Hong Kong dollars to devaluate and at the same time, not ask the IMF for help, and China's Central Bank does not lend a hand ?

Answer : I think no. If Hong Kong government forsake the peg, the situation happened in Thailand, Malaysia, Indonesia, Korea will happen here. Either China intervenes by paying the debt for Hong Kong, or Hong Kong has to ask the IMF for help.

Question : Doing the same manual work, exerting the same manual effort, a person in Asia earns much less than their American or European counterparts (say, e.g. Bangeldesh, Thailand), why is there so great a discrepancy ? (Personally, I think, many Americans and Europeans who engaged in high technological work should earn more because of their knowledge and expertise. But manual work has no difference. In fact, many Asians exert much more physical effort in doing manual work than their USA or European counterparts) ?

Answer : I think it is because of the present banking system, which is a credit system without actual physical backing. Hence a bank from a large country enjoys much greater trust from the world than that from a poor, political unstable country. If silver is the money, such discrepancy would not happen.

Question : USA has big deficit in Balance of payment, because it imports much more than it exports (even for its highly priced goods, e.g. Software from USA), hence USA banks owe a lot to foreign banks. Why is the world still willing to lend to USA ?

Answer : I think it is because the interest rate in Japan (near 0%), and in Europe are lower than that in USA, hence bankers are contented to leave their money there. Even if interest rates are higher in Europe, and the Federal Reserve Bank of USA refuse to raise rate, what can the world do ?

Question : Would Hong Kong be in trouble, if the interest rate in USA rise ?

Answer : If the interest rate in USA is not too high, Hong Kong can cope. But if interest rate is high, say 10% in USA, which is unlikely now as interest rate in Europe is low, manufacturers in Hong Kong and many people will suffer.

Question : USA, Canada, Japan, Australia, ... many countries has big national debts which they are unable to repay. Hong Kong's banks are in great debt. Will trouble happen?

Answer : From a physical point of view, if the political situations are stable, oweing lot of debt is not a problem. Life seems to be going on as usual. This is our human point of view. Not that from LORD. Borrowing a lot of money to live luxuriant lifes and not repay is not slight in LORD's sight, see Revelation Chapter 18.

Question : what can Hong Kong do to reduce its debt?

Answer : I think Hong Kong Government should encourage the people to produce more, increase their productivity by cutting back regulations and red-tape. Hong Kong Government has set up flea market in the old Kai Tai Airport, but that flea market is not convenient for ordinary people, who has to travel by bus and bus fare is expensive. If Hong Kong Government would allow people without license (or it issues license generously at low cost) to set up flea market in all available places , e.g. under fly-overs or empty places, and to allow private or small home business to operate without licence, and encourage people to practice all sort of commercial and industrial activities as long as it does not break LORD's law, the productivity of Hong Kong may increase. And if people in Hong Kong are happy, tourist will come, and it will ease our debt. But first of all, Hong Kong people should learn about LORD's law, and if more people know LORD's laws, LORD's political system may be implemented here. Only with LORD's political system in place, (with justice and freedom under the law), and not this political system inherited from the Romans, would Hong Kong's productivity be increased greatly.

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