Hongkong's problem: inbred rabbits

SCMP November 18

First, let me declare an interest. I am a flat owner so I am one of those people who is supposed to benefit from the government's latest attempt to prop up property prices, even though they remain far above levels in competitive cities from Singapore to Shanghai and at least six times what they were during the property bear market of 1984/85. Do I rejoice? No, I am aghast at yet another surrender to sectional interests of the spoiled, inbred, uncompetitive, arrogant and selfish business oligarchy which runs this town to the great disadvantage of the small businesses which are its lifeblood and the wage workers and now old people who built it.

The big property players are of course most pleased. It is not just that the government has again made a direct attempt to push prices. The refusal to sell public land is a particular advantage to old established developers who own tracts of developable agricultural land at the expense of those might want to enter the development business.

The other sufferers from Mr Tung's latest surrender to cronyism will be impoverished old people who will likely see allowances cut in order to reduce a fiscal deficit exacerbated by cessation of land sales. In line for being squeezed are another powerless group, the foreign domestic helpers who, it is suggested, should be pay 13% of their modest wages in tax. Salary earners tax payers incomes have to get to around $3 million before they pay tax at that rate!

The government is attempting to soften its image of the party of the rich by pressing for lower electricity prices. For sure, prices are high due to the over-generous schemes of control which offer high returns and an incentive to over-invest in capacity (but not in anti-pollution measures). But the Scheme is transparent and leaning on the companies to accept lower returns suggests that government cares little for the spirit of contracts. Most likely however, the higher cost provider, Li Ka-shing's HK Electric will agree to cuts knowing that other group companies will benefit much more from the property decisions. Mutual back-scratching is no way to run a government.

Meanwhile a consequence of the land and HOS sales freezes will be to drive down actual investment in Hongkong. The government seems not to care that measures to help its friends further reduce already hard hit construction, and hence employment. The deflationary impact on the real economy of this attempt to re-flate the bubble economy has been ignored.

Entrenched interests and second generation plutocrats who have acquired political power as well as inherited wealth are part of Hongkong's wider economic problems.
Given the importance of transparency at a time of fiscal difficulty, it would be interesting to know the market value of the quotas that the family firms of policy makers Henry Tang and James Tien, major players in textiles and garments, receive free from the government. It would also be instructive to know how much of that quota is used by these firms and how much sold to others.

Mr Tang in his capacity of head of both Commerce and Broadcasting policies should also be asked why the government has apparently been unwilling to enforce the copyright and other ordinances in respect of pirating of TV signals. It is believed that there are more than 100,000 illegal users costing the suppliers perhaps $300 million a year. In lieu of official action, a private prosecution is being brought. No wonder Hongkong has lost out to other centres for regional broadcasting.Article 23 is just another nail in the coffin of what ought to be a major, and high value-added, industry.

An even higher value added industry is financial services. Its problems are global and Hongkong is being affected in a way it was not during the Asian crisis. Then many pulled Asian operations back to Hongkong from Bangkok, KL etc. Now many are retreating to New York or London. But Hongkong is not exactly helping itself either, thanks to entrenched interests. The small brokers are again set to delay abolition of fixed commissions,which would help keep business in Hongkong.

The exploitation of small investor interests continues to be rampant. Controlling interests routinely rape minorities through connected party transactions without a squeak from the exchange or the SFC. The listing committee of the exchange which, if it has any purpose is quality control of existing listings as well as new ones, is a disgrace. It mainly represents the interests of share issuers not investors. Hongkong badly needs an Eliot Spitzer to investigate some IPOs of the past four years and the links between issuing companies, investment banks, brokerage researchers, auditors and lawyers.

As one familiar with the old monopoly exchange run by Ronald Li, and the four exchanges which preceded it, I do not believe standards have improved much in thirty years. Corporate governance of some very large companies is better. But the average has not changed despite the proliferation of an SFC bureaucracy which is highly paid to shuffle paper but has done little to promote prosecution of frauds and criminal breaches of trust. Poor supervision is one reason why even quality H share companies such as in the energy and power sectors trade on low valuations. This has a huge opportunity cost for China.

Few will mourn the departure of K.C. Kwong, the exchange's over-paid chief executive. The appointment of a civil servant always seemed inappropriate. But will there be any improvement in regulation to make Hongkong stocks, particularly those of mid-size family companies, more attractive to investors? Referring to the vetting role of the Exchange, the chairman of Company Law Reform Commission caustically and accurately remarked: "You cannot have the rabbits in charge of the lettuce". But they are. Indeed a few top rabbits control much of Hongkong's diminished supply of lettuce.


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