Years on: legacy and agony
SCMP June 3
The Japanese have had ten years of economic and stock
market disappointment. So do not suppose that Hongkong's five years
of post-handover stasis is either exceptional or that the cycle will
surely turn up again soon.
To make a stab at forecasting the future it is necessary
to try to assess how much of Hongkong's present condition is the result
of outside forces, how much was inherited from the actions of the previous
administration and how much has been caused by the policies, or lack
thereof, of Tung Chee-hwa and his team.
The worst short term legacy of the ancien regime was
the property bubble (and accompanying Red Chip share scam) which peaked
just before the handover.The euphoria suited the interests of both Britain
and China, and the greed instincts of the local property-owning population.
It was indulged by the HK Monetary Authority, then as now headed by
Joseph Yam which - despite warnings -- made no effort to limit the credit
growth which fuelled the bubble. Property prices would have deflated
anyway, regardless of the Asian crisis which merely advanced the collapse
by a few months. As in Japan, it has left a trail of households with
negative equity and perceived need to save more, acting as a continuing
dampener on the economy as a whole.
At the same time property and other prices failed to
deflate fast enough to keep Hongkong competitive in an Asia which was
dramatically deflated by the currency and asset price collapses on 1997/98.
The numerous efforts - moratorium on land sales, end of HOS sales, tax
relief for mortgages etc -- made by the government to help the property
sector in general and the developers' cartel in particular slowed the
This undoubtedly helped limit the number of corporate
and household bankruptcies. Unlike elsewhere in Asia, relatively little
debt was in foreign currency and the peg spared Hongkong the impact
of sharp currency falls on unhedged borrowers of foreign exchange. Meanwhile
the fall in interest rates since 1998 has enabled most over-indebted
households to withstand negative equity despite the rise in unemployment.
Like Japan, Hongkong has avoided major Thai or Korean
style crisis but equally this has meant prolonging the period of stasis.
Prices have not fallen far enough to bring buyers flooding back, despite
record low interest rates. For fiscal reasons, the government now needs
to sell more land, and interest rates are now more likely to go up than
down. Government policy on housing still seems a monstrous muddle trying
simultaneously to satisfy the demands of the masses for better housing
at affordable levels, and of the developers (who are more interested
in fat margins than in volume) and existing owners who want to see prices
Ideally the government should reduce its role in housing.
But it can only do so if affordability improves further. A sharp decline
in the dollar, the return of some inflation and hence a fall in real
interest rates should relieve the situation over the next two years.
Previous asset price booms in Hongkong have generally been preceded
by a decline in the currency. But demographics is now unfavourable.
Though the population is growing at 1% a year due to immigration, new
household formation is declining due to a fall in the 25-35 year group
and few newcomers from the mainland have the skills and capital to be
able to afford to buy their own homes.
The property bubble legacy would have been a huge burden
for any government. But short term measures and the influence of the
crony capitalists on public policy has made a bad situation worse. Out
of the mess may finally come a coherent housing policy and fiscal policy
reforms. But so far government has shied away from hard decisions on
taxes which would reverse the irresponsible erosion of the recurrent
tax base indulged in by Donald Tsang.
Government deficits of 2-3% of GDP have been justifiable
in the short term as counter-cyclical props to the economy. But they
must soon be reined in regardless of the overall economy, and temporary
deficits are no excuse for putting off tax reform. As it is, the operating
budget looks now to be deep in the red for several years. Land sales
revenue will pick up but even so the government is likely to have to
continue large scale asset sales - such as the MTRC/KCR to balance its
budget. That is not a process that can continue indefinitely - ask Argentina.
One asset sale with diminishing returns is the Tracker
Fund. Remember how Donald Tsang boasted about the success of the stockmarket
intervention in defeating speculators and delivering a huge profit to
the government? The intervention may have had short term benefits -
though it was not neccessary to save the peg. What is coming through
now is the long term cost - the overhang of Tracker units which has
helped depress the market, and the use of MPF savings to fund the government's
deficit by buying its Tracker shares.
There is also no doubt that the intervention damaged Hongkong's
free market reputation, and reduced stock market activity by drastically
reducing the free float of Hang Seng index companies. Worrying too has
been the reaction of officialdom to the challenges posed by the Asian
In Korea, even in Malaysia and Thailand entrenched interests
have been overthrown, cartels opened up. But Hongkong remains beholden
to the interests of a small groups of inordinately influential people
who dominate large areas not just of the domestic economy but of those
which provide its links to the outside world. Port expansion has effectively
been vetoed by the existing players. Air traffic rights protect Cathay
Pacific at the expense of the territory's hub role. The Jockey Club
has had its betting monopoly re-inforced. The Stock Exchange remains
a private monopoly maintaining commission rules which militate against
Hongkong's ability to compete as an international centre, and abjectly
failing to impose reasonable standards on listed companies.
The GEM has been a disgrace. These have not just been
minor matters. Investments which should have gone into real businesses
ended end enriching the initial, already very rich, pre-flotation investors
in the likes of PCCW and Tom.com at the expense of the public. Massive
losses by individual and institutional investors have had a depressing
effect on investor confidence. The same may have happened in the US
- but at least the US has legal remedies.
None of this is altogether new in Hongkong. But it has
been highlighted by recession and the bursting of bubbles. It also appears
to have become worse as the links between the political leadership and
the leading families have been strengthened and the separation between
the bureaucracy and private institutions such as the Stock Exchange
been eroded. The Cyberport fiasco may have generated enough derision
not to be repeated, but the kind of thinking which produced it is still
The damage caused by Hongkong's version of cronyism has
been increased both by the strong dollar, and by the development of
China. It is still often complacently assumed that Hongkong automatically
benefits from China's growth. In fact China is showing diminishing need
for Hongkong as intermediary as its own transport and service infrastructure
That is not to condemn Hongkong to the margin of China.
But it does emphasise the need to allow new services to spring up, if
necessary at the expense of old business and professional cartels and
liberalising entry of mainland professionals. It also means taking better
advantage of Hongkong's international links, and introducing competition
laws which encourage new business and cut costs all round. Hongkong's
problems are not unique.
Singapore is suffering from Malaysian competition jut
as Hongkong must now compete with the mainland. Freer trade and movement
of capital around Asia, and indeed globally, and a general lowering
of taxes have reduced the relative attractions of the city states. But
Singapore's leaders at least have clear policies, wrong-headed though
these may sometimes be. Hongkong leaders meanwhile bandy about silly
slogans like "Asia's world city" but their vision seldom seems to go
beyond emphasising the merits of the Pearl River delta, as though that,
not Hongkong's own institutions and world trading links, were its biggest
Instead of emphasising the attraction of Hongkong as
a competitive global financial centre, Joseph Yam, the world's highest
paid central banker, has been out with his begging bowl, asking for
special privileges. He has been trying to convince a rightly sceptical
Beijing that mainlanders should be allowed to invest in Hongkong stocks
before they can invest in New York, Frankfurt or Singapore.
Such attempts to claim One Country privileges makes a
mockery of the Two Systems and undermines the unique status that has
been the basis of Hongkong's prosperity. Such attitudes will undermine
Hongkong's prospects long after the property bubble collapse has finally
worked its way through the system.
The way Hongkong has been managed these past five years
reminds me of a comment I made in a column before the handover. If Hongkong
could not elect its chief executive it would be best off with a hard
headed mainland provincial governor with an outsider's clear view of
Hongkong's strengths, allies in the Politburo, not beholden to local
businessmen and as determined to do a great job for his adopted "country"
as former Dutch coach Guus Hiddink has done for Korea's football team.
As it is, in his efforts to please everyone from Li Ka-shing to Beijing
to home owners and the old leftists Mr Tung has lost sight of the three
things that matter most: openness, competition, internationalism. ends