Tung's Lost Opportunity (SCMP)
Fate has not been kind to
Mr Tung Chee-hwa these past four years since the handover. The Asian
crisis. The collapse of the local property bubble. Now the global slowdown
and the uncertainties of an usual war. He has had to cope with the need
to balance the national demands of Beijing, representative of One Country,
with the local demands of Hongkong, the second system.
So before blaming him for the decline
in Hongkong's fortunes from the high growth and optimism of 1997 to
today's gloomy mood it is as well to remember the regional and global
background. It is also as well to make some policy suggestions beyond
simply pleading for handouts of cash. On that score, the main opposition,
the Democrat Party, has failed dismally.
Hongkong survived the 1997-98 crisis better
than most in the region. And now it is at least set to fare better than
Singapore. Indeed, Mr Tung must at least be thankful that his own early
enthusiasm for Singaporean ways of doing things - in particular trying
to "pick winners" for the economy -- never got much beyond the Cyberport,
which is now a dirty word even in government circles.
The latest downturn has been an opportunity
- his last of this term - for Mr Tung to prove his critics wrong, to
show strong leadership, develop new initiatives, tackle issues at their
roots. Unfortunately, to judge from his recent policy address, he threw
away the opportunity of adversity to make some radical changes which
address structural problems. There was nothing specifically wrong about
most of the short term measures. But the nearest he has come to a major
new initiative was the proposal that most policy secretaries become
political appointees for the duration of the chief executive's term.
On the two most burning issues of today,
Mr Tung offered no new ideas. Firstly housing. This has long been the
most glaring blot on his administration, with so many twists and U-turns,
often dictated by the interests of property developers that no one really
knows whether there is any long term policy at all. The rates and public
housing rental holidays will provide some immediate relief to everyone.
The increase in the tax deductibility of mortgage interest will help
the few salaries tax earners able to afford a mortgage of $5 million
or more. But beyond that there is not a word on how to address THE fundamental
problem: How to improve housing standards - still abysmally low for
a society as supposedly as wealthy as Hongkong - without threatening
the stability of the financial sector.
Hongkong needs better housing. It also
needs an upturn in housing construction work to help it through the
global downturn. It needs to further reduce the gap between public and
private housing costs. It also needs to get revenue from land sales.
There is no easy answer to this conundrun of conflicting demands. But
the government appears not even to acknowledge its existence. Short
term measures provide no guidance for developers, prospective home owners,
investors, or indeed those in the Housing Authority or other public
bodies dealing with housing. Meanwhile it is spending more money on
infrastructure though much - on Lantau, West Kowloon etc -- is underutilized
due to the dearth of new housing projects.
Thankfully the government has not listened
to the special pleading of those with negative equity. The size of this
group has been greatly exaggerated. The Monetary Authority puts it at
65,000 not the 200,000 claimed by interest groups. It is almost certainly
even less if one excludes the speculators buying second and more flats
and those who took profits during the boom and traded up. The number
of new private sector flats which came on the market at the height of
the boom was very small and much of the high turnover during the period
was trader not owner occupier driven.
But two things are needed to protect households
and by extension the banks from any further falls in asset prices: jobs
and a continuation of low interest rates. After all, to an owner-occupier
what matters primarily is not negative equity per se but whether he
can pay the mortgage at all. So far many households have been saved
from declining incomes by sharply declining mortgage costs. The HKMA
is making a useful contribution to relieving payment burdens by allowing
mortgages of up to 100% of valuation. This will making refinancing easier
and enable borrowers to escape from loans at the up to 2% over prime
being charged prior to the collapse of loan demand.
However, what happens if rates start to
rise again before incomes do? In the short run it is more likely that
rates will fall further. But few want to take a chance on this. So now
is surely a good time for the government to look at what it could do
through its Mortgage Corporation to take advantage of current low borrowing
rates and enable more home owners to lock into fixed rate obligations.
Only a small fraction of mortgages are currently at fixed rate due the
dearth of long term money which in turn is due to domination of the
credit system by the commercial banks.
As the balance sheet structure of banks
(rightly) makes them unwilling to offer fixed rates, the Mortgage Corporation
should be more aggressive. It borrows long term so should concentrate
its mortgage-buying on fixed rate loans. There is no need to go as far
as the US government mortgage buyers Fannie Mae etc which seem to have
financed a real estate bubble to offset the tech bubble collapse. But
30 (or just 20) year money at 6.4% -- the current rate in the US - would
provide some confidence to new buyers that at least interest risk is
known. That shouldn't be impossible given the current level of long
term bond yields in $, Yen, Euros, or even the 10 year yields in NT
dollars, Baht etc.
Interest rates issues take us to the currency.
The HK dollar is overvalued and real interest rates far too high. Hongkong
still has deflation while in the US, to which we are pegged, inflation
is over 2.5%. New Financial Secretary Anthony Leung has now hinted on
at least two occasions that the peg is not for ever. It is a product
of circumstance. That is a welcome breath of common sense after years
when the topic was viewed as beyond debate. But why not act on it?
Times have changed. Let the peg go, drop
interest rates by another 150 basis points, and at a stroke Hongkong's
competitiveness is improved, the burden of mortgage debt eased, deflation
halted and local asset prices become more attractive to locals and foreigners
alike. That is the bold new thinking that Mr Tung could show - and whose
logic Mr Leung seems to accept. Or is Mr Tung waiting for a Renminbi
upward revaluation? Or the Argentine peg to collapse? Or the US dollar
to fall sharply?
One gets the feelings that instead of taking
matters into his own hands he is just "waiting for something to turn
up". The second major issue is employment. Make-work measures have been
announced which will use government money to create temporary unskilled
jobs. But there is not a sign of a re-think of policy on immigration
of unskilled workers, who are mostly, though not entirely, one way permit
holders from the mainland. Despite the economic slowdown total employment
is not falling, but because of immigration unemployment is rising.
Surely Mr Tung must by now have earned
enough influence in Beijing to allow an alteration of the system of
One Way permit issuance so as to make it more difficult for unskilled
people to come here, but easier for skilled mainlanders. Can't Hongkong
be allowed to decide these things? The Chief Executive has been able
to persuade the mainland to abolish the daily ceiling on mainland visitors
so why not address the more important question of one way permits? Maybe
this is sensitive topic among mainland officials for whom the system
is, allegedly, a source of revenue. But Mr Tung could simultaneously
stand up for Hongkong, and an uncorrupt permit process.
Changing the one way permit system to one
which suits Hongkong's interests would increase Hongkong's ability to
develop the high value added services in demand on the mainland while
limiting the social costs of immigration. The influx of low skill workers,
mostly without capital, into this high cost economy is a major factor
behind the widening income gap.
The influx is a major cause of the structural
unemployment which now exists even though wages for the likes of cleaners
are pitifully low. Incomes of the bottom 20% are a fraction of per capita
GDP and barely a living wage even for people with access to cheap public
housing, education and health. At the other end of the income scale
the restrictive practices enjoyed by various professions - lawyers,
academics and doctors in particular - mitigate against the welfare of
the rest of the community and frustrate the development of Hongkong
as a service centre. Lack of direction on the issues where government
policy is crucial is very disappointing. The fiscal reserves have become
a cushion shielding the government from its mistakes. Meanwhile despite
the rhetoric about the opportunities from reuniting with the motherland
Hongkong has conspicuously failed to take advantage China's growth since
1997. Indeed, it now seems to see the mainland as a crutch - at least
if we believe the Financial Times story that Hongkong wants Beijing
to make an exception to its policy on capital movements to allow Yuan
investment in HK stocks. How many mainlanders would want to buy anything
other than H shares is another matter. Mainland corporate governance
is beginning to look good compared with Hongkong's recent record of
insider rip-offs by well known groups. Mainlanders are wising up. Are