Big winners

SCMP August 25 2009

The Hong Kong government claims to be helping develop new engines of economic growth. But its actual policies are handing outsized profits to a favoured few at the expense of small and growth businesses. The August 15 issue of The Economist makes a telling point about one of the reasons behind Japan's long sluggish performance: corporate profits as a percentage of output are 60 per cent for large and medium-sized firms but only 20 per cent for small firms.

A few of those big firms may be brand names operating amid international competition, but most are domestically oriented companies in regulated, protected markets. Their profits reflect a squeeze on wages and high prices for consumers caused by inadequate competition and high barriers to entry. Small businesses lack the clout to rig the system.

And so it is in Hong Kong. The equivalent data may not be available but a glance at the performance of the major domestically oriented conglomerates shows very clearly how the manipulation of government enables many to achieve remarkably high profit levels.

Overall, the share of employees in value added has been falling since 2001 as profit levels have risen. Profits have not yet regained their 1994-96 peaks when the Real Estate Developers' Margin (no longer a separate item in the national accounts) accounted for 9 per cent of gross domestic product. But, at 48 per cent of value added, they are healthy enough.

Just look at developers' profits in the light of the collapse of housing construction, a collapse almost entirely due to government actions that have no economic rationale and simply favour a handful of landowners and their representatives on the Executive Council.

Although public housing construction has almost halted - despite the continuing disgrace of cage homes - private housing supply has also fallen to record lows. Lower household formation growth is one reason.

But the main beneficial policy has been the government's deliberate refusal to sell land. Since regular auctions were replaced five years ago, a yearly average of just 5.5 hectares has been sold under the application system, even though the Lands Department has about 60 hectares on its application list.

The net result is that big developers (and New Territories landlords) with existing land banks, and the MTR Corporation, with its special relationship with the government, have been able to reap huge development profits from a supply squeeze. The MTR Corp alone is making HK$4 billion a year or more on turnover of less than double that. New developers are either thwarted or have to bid up prices to the levels determined by Lands Department bureaucrats and their political masters.

The cost of this to the wider economy, and particularly the new services that the government says it wants to encourage, is huge. So, too, are the profits of other companies that have a captive market. Stock and futures monopoly the Hong Kong Exchanges and Clearing managed last year to show profits of HK$5.9 billion on revenue of HK$7.5 billion despite the market setbacks. Its level of profit to market turnover would be impossible without government protection that has stifled market development.

Gross domestic product data for 2007 shows power, gas and water suppliers making profits equal to 86 per cent of their value added and 61 per cent of gross turnover. Under the Scheme of Control, in 2008 Hongkong Electric, which supplies only a third of the special administrative region's power, made a net profit of HK$7 billion on turnover of HK$14.5 billion. This year, the power companies are having their profits cut back from the enormous to the merely very generous.

Then there are the local bank profits. Competition for business certainly exists but margins have long been very comfortable, in part thanks to the huge size of the mortgage market and the absence of alternative providers other than, indirectly, the government's own mortgage corporation, itself more a job-creation institution for Monetary Authority officials than a competitive player.

While borrowers have reaped the benefits of inflation, small savers have seen their nest eggs being eroded by inflation and bank profits.

Hong Kong used to thrive on raw, dynamic capitalism. That is being throttled by a bureaucratic pseudo-capitalism that is no less unequal, but much less effective, in creating wealth.




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