Hong Kong urged to issue more bonds and dip into reserves to tackle deficit

Hong Kong should tackle the government deficit by issuing more bonds to fund infrastructure investment and use part of its reserves to boost spending, one of the city’s leading business schools has proposed, stressing the shortfall will not be eliminated through economic growth alone.

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In a paper published on Thursday, the University of Hong Kong’s Business School drew attention to the large portion of the nearly HK$100 billion (US$12.85 billion) deficit that was structural, suggesting more aggressive measures were needed to help balance the budget.

Associate Professor Liu Yang, who authored one chapter, noted the city’s vulnerability to financial shocks arising from the years-long downturn in the property market and argued the budget challenges could not be resolved simply through economic recovery.

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Hong Kong’s reserves, which stood at HK$734.59 billion as of March last year, were equal to 25 per cent of the city’s gross domestic product, one of the highest proportions among developed economies. Liu warned that keeping reserves so high could be “counterproductive”.

“If the economy has not experienced a downturn in five years and reserves continue to reach new highs, the government could consider moderately reducing reserve levels by increasing spending, providing subsidies and offering tax relief,” the economist wrote.

He also suggested making full use of the capacity of the government’s bond programme to raise funds for infrastructure projects, which would foster the development of capital markets and help the internationalisation of the renminbi.