JAKE VAN DER KAMP

"For those who are sceptical about the benefits of Cepa, you may wish to note that the growth of investment in industrial machinery for manufacturing use, having suffered several years of set-back, has been rising very rapidly since early this year, registering 18 per cent growth in quarter one, 12 per cent in quarter two and a whopping 33 per cent in quarter three. The timing of these investments coincided well with Cepa."

Henry Tang Ying-yen
Financial Secretary
General Chamber of Commerce speech

"Whopping", was it? Henry is clutching at straws here. He is financial secretary in part because he did such a whoop-up job of promoting the Closer Economic Partnership Arrangement shortly before his appointment and, as this was the boss's pet project, it is incumbent on him to keep blowing the hot air through the trumpet.

But the fact is that private investment in machinery always goes shooting way up with economic recovery. If it is up now by 33 per cent it was up by as much in the first quarter of 2000 when the internet boom briefly lifted our economic fortunes and plummeted by as much in the first quarter of 2002.

Industry shies away from investing in new equipment when times are tough and then rushes to catch up with capital requirements when economic recovery comes round. People who pin their hopes and fears on this one indicator will soon become manic-depressives.

Even then, however, it does not say much about Cepa. The test of the cooking is in the actual eating. If partial early relaxation of the mainland's import barriers had indeed brought us great benefits, then we should have seen them by now in a big boom of domestic exports to the mainland.

Yes, the figures are up again but only marginally and exports to elsewhere are rising faster. As the chart shows, the proportion of domestic exports going to the mainland has been in decline since mid-2002. This is after excluding garments from the figures as our rag trade is driven only by quota dodges these days. The pattern is pretty much the same when they are included.

For evidence of Cepa success I can give Henry at most that one slight upward blip in the chart following the signing of Cepa at the end of June last year but it was not much and it is gone now anyway.

There is more to take into consideration here, however. What we have left in our diminished manufacturing industries is increasingly a residual base for domestic consumption. Printing and food preparation alone account for more than 40 per cent of the manufacturing work force (the rag trade excepted again) and these are not industries with any significant market in the mainland.

Some of the new industrial investment in Hong Kong appears in any case due to garment makers realising that the United States will cheat on its obligations with the scheduled abolition of garment quotas in January. The US government has signalled strongly in recent months that it will keep many of them, which means the local rag trade must keep its machinery in operation longer than expected.

It is thus a very long stretch to claim that Cepa sceptics have been proved wrong because investment in machinery is up in Hong Kong. I shall say it again. Cepa is all flash and no bang.

Fortunately, Henry did have a little substance to offer in his speech to the chamber of commerce. He dashed his audience's hopes that they might get a cut in wine duties and abolition of estate duties in his next budget. "I'm afraid I will have to disappoint you," he said.

But then we went back to Henry The Muddled: "We cannot rely on windfalls from non-recurrent revenue to fund operating expenditure. Non-recurrent revenue is subject to too much volatility. Since 1997, annual investment income has ranged from as low as under $1 billion to as high as $42 billion. Similarly, land premium revenue has varied widely from $5 billion to $71 billion."

Henry, the only reason that your investment income is so volatile is that you insist on making it so by booking paper profits as real cash earnings and then finding that you do not have them the next year when markets turn the other way. The underlying picture is not so volatile at all.

As to land premium income, it is not part of your operating budget. It goes into a sinking fund set up precisely to avoid volatility in operating revenues. Look it up some day under Capital Works Reserve Fund.