In what ways can you spend RMB20 billion (US$3.14 billion)? The amount is close enough to build three hotel towers, resembling the US$1.1-billion hotel Morpheus designed by the late award-winning architect Dame Zaha Hadid recently unveiled in the local integrated resort of City of Dreams Macau. Or everyone in Macau could pick up MOP38,592.3 (US$4,824) if the money were equally shared among the 656,700 people here.
The Macau Government, however, has other ideas about investing the capital, recently inking a pact with nearby Guangdong Province to set up the RMB20 billion Guangdong-Macao Co-operation and Development Fund. While some observers cheer the latest move in enhancing the efficiency of the city’s fiscal reserves naysayers lament that the public has been left with no choice but to accept this ‘political mission’.
According to the agreement Macau and Guangdong sealed in May, the city would inject a total of RMB20 billion into the Fund, which has an initial lifespan of 12 years, in several batches from the fiscal reserves. The Guangdong-Macau fund will be managed by a new firm established by two Guangdong state-owned enterprises; namely, Guangdong Hengjian Investment Holding Co. Ltd. and Guangdong Namyue Group.
“Due to the complexity of projects [across the border], Macau may not have enough skills and expertise to invest alone so a partnership is required,” said local economist José Luís de Sales Marques.
The fund will invest in key high quality projects, including those related to the Guangdong-Hong Kong-Macau Greater Bay Area and those beneficial to the economy and livelihood of the two regions, as well as the infrastructure of Free Trade Zones in Guangdong, according to the Office of the Macau Secretary for Economy and Finance. The fund would guarantee a return rate of 3.5 per cent on the actual investment, with the local fiscal reserves entitled to additional yields ‘when the fund’s returns exceed a certain amount,’ the Office revealed in a statement.
Locally based economist José Luís de Sales Marques praised the establishment of the fund, which could enhance the investment return rate of the fiscal reserves – standing at MOP514.89 billion as at end-March. “The return of the fund is better in general than what happens to the investments of the fiscal reserve now,” he said.
Greater Bay Area
“It is a good solution for Macau to partner with Guangdong to make good use of its fiscal reserve in investing in projects [in Guangdong and the Greater Bay Area],” he continued. “Due to the complexity of projects [across the border], Macau may not have enough skills and expertise to invest alone so a partnership is required.”
“As the development scale of Macau has become quite mature, it is difficult to find a local project that could yield a high investment return without too many risks,” said Chan Kin Sun, an Assistant Professor of Political Science at the University of Macau.
Figures from the Monetary Authority of Macau reveal that the investment return rate of the fiscal reserve hit 4.8 per cent last year, the highest since a new fiscal reserve mechanism was established in 2012. In the 2012-2016 period the annual investment return averaged only 1.62 per cent, according to calculations based upon official data. The investments made by the fiscal reserve at the moment mainly involve bonds and equities in the Mainland Chinese and overseas markets.
Sales Marques added that the fund helps Macau participate in the development of the Greater Bay Area. “There have been questions before about how Macau could contribute to the development of the Greater Bay Area,” he said. “And I think the Fund can answer these questions.”
“The city could also gain experience [in managing funds and financial institutions] by working with Guangdong and [could] have more insights into the dynamic of the Greater Bay Area,” the economist added.
The Greater Bay Area refers to the scheme of the central government that seeks to integrate Macau and Hong Kong with nine Guangdong cities in order to establish an integrated economic and business hub. The three parties inked a pact last year to push forward the establishment of the Area.
Following the inking of the fund agreement in May, Chinese state-run news agency Xinhua reported that it could facilitate industrial and financial co-operation in the Greater Bay Area, enabling ‘Macau residents to share the fruits of the development of the Greater Bay Area and the economic development of Guangdong.’
The local government intends to make better use of the fiscal reserves for ventures abroad in the wake of the public complaints about their low investment returns, usually lower than annual inflation. In his 2014 manifesto running for another five-year term as Chief Executive, Fernando Chui Sai On first proposed the territory set up a sovereign fund for investments beyond Macau, backed up by the fiscal reserves.
Macau and Guangdong inked a memorandum of understanding in 2016, paving the way for the establishment of the Guangdong-Macao Co-operation and Development Fund this year. In the Policy Address session last year, Macau officials also flagged the possibility of setting up the Greater Bay Area Investment and Development Fund as a way for the territory to participate in projects in the region.
“As the development scale of Macau has become quite mature, it is difficult to find a local project that could yield a high investment return without too many risks,” said Chan Kin Sun, an Assistant Professor of Political Science at the University of Macau. “So it is pretty necessary for the government to look for investment opportunities beyond Macau should it aim to enhance the returns of its fiscal reserves.”
But the establishment of the Guangdong-Macao Co-operation and Development Fund has raised fears about the waste of public coffers, given the track record of transparency of the authorities, as well as the overlapping positioning of funds like the Guangdong-Macau fund and the Greater Bay Area Fund.
“The government is moving in the right direction and it will set more rules to govern the operation of the funds step by step,” said Prof. Chan. “The ideal scenario is that the funds become more and more transparent but this process takes time.”
Legislator Sulu Sou Ka Hou has been among those expressing vocal dissident about the Guangdong-Macau fund since the government revealed its intentions. He highlighted a recent incident of the possibility of more injections to the fund being an instance of the low transparency of the Administration.
“Even though the fund may not make sense officials could still defend that it’s to the benefit of Macau to be integrated [with Mainland China],” said legislator Sulu Sou Ka Hou.
A few days after the Guangdong-Macau fund deal was inked a fund manager revealed that the capital size of the fund could be raised to RMB100 billion from the current RMB20 billion should both Macau and Guangdong agree, information that has never been disclosed by the government. In light of this latest development, the Monetary Authority of Macau, which manages the city’s fiscal reserves, acknowledged in a statement that capital could be increased to RMB100 billion but that neither side had the intention of doing so at the moment.
“This incident shows how non-transparent the fund is and whether there is more information the government has withheld,” Mr. Sou criticised.
The legislator also noted that not enough information has been disclosed by the government for the public to determine whether there are better means of utilising the money than investing across the border.
“Despite the low returns of the past few years, the return yield [of the fiscal reserves] was some 4 per cent last year, which is better than the guaranteed return of the [Guangdong-Macau] fund now,” he noted. “It makes you wonder whether there are better investment vehicles.”
Rather than making better use of the city’s fiscal reserves, the legislator believes the fund is a political mission. “It’s all about political correctness: it’s just a plan for Macau to be integrated into the Greater Bay Area,” he said. “Even though the fund may not make sense, officials could still defend that it’s to the benefit of Macau to be integrated [with Mainland China].”
On the rise
The city’s fiscal reserves have expanded more than fourfold over the past few years since a new fiscal reserves regime was introduced in 2012.
According to figures from the Monetary Authority of Macau, the city’s fiscal reserves – usually referring to basic reserves plus excess reserves excluding foreign exchange reserves – amounted to MOP514.89 billion (US$64.36 billion) as at end-March, surging 413.7 per cent from MOP100.24 billion as at end-2012.
The exponential growth was due to the great amount of fiscal surplus the city recorded every year, driven by mega gaming resorts and casinos. For instance, the territory still posted a fiscal surplus of MOP52.64 billion in 2015, in the depths of the economic recession and turmoil in the gaming sector.
Meanwhile, the city’s foreign exchange reserves totalled MOP156.89 billion as at end-March, rising by 1.16 per cent from a year earlier and 18.41 per cent as at end-2012 the figures show.