The myth of a free Hong Kong economy
By Eddie Leung and Pepe Escobar
This is the first article in a three-part report
HONG KONG - Open any standard economic textbook and look for the definition of a free economy; its key characteristic is the lack of government intervention. Less state intervention means a freer market.
On this standard, Hong Kong has been hailed as the world's freest economy for more than two decades. But is this the whole truth? What if the main sectors of the whole economy are dominated by a few oligopolies or even a virtual monopoly?
Let's look at the hypothetical case of Mr and Mrs Chan, an average Hong Kong household. Both Mr and Mrs Chan are senior-level employees of the Hong Kong government and earn a total monthly salary of HK$85,000 (US$10,900).
The Chan family bought a 800 square feet (74 square meters) flat from Cheung Kong (owned by the richest local tycoon, Li Ka-Shing) and has to pay a mortgage of HK$30,000 a month. The couple subscribes to the 3shop mobile phone service, a subsidiary of Hutchison Whampoa (also owned by Li) and pay a monthly service fee of HK$2,000.
Wherever they go to buy their daily necessities, they use Park'n Shop (a supermarket chain owned by Li), where they spend about HK$5,000 every month.
Whenever the Chan family pays their electricity bill (HK$1,000 per month), it goes to Hong Kong Electricity (again owned by Li). For pharmaceutical products, they go to Watsons (again owned by Li), and they spend HK$2,000.
Let's say the couple wants to purchase the latest LCD monitor for their son; they buy it from Fortress (still owned by Li). The couple subscribes to the paid TV service of NOW for HK$1,000 a month. This time the service is not owned by Li himself, but rather Richard Li, his youngest son.
One might ask: how come that almost half of what Mr and Mrs Chan earn contribute to the coffers of Li Ka-shing? Do we really want to call this the freest economy in the world, or even a free economy?
A gilded cage?
In every poll, Hong Kong is invariably ranked as among or the most expensive city in Asia - usually behind Japanese megalopolises like Tokyo and Osaka. It's at least the fifth-priciest in the world to own a home; [1] the second priciest to rent an apartment; [2] and Queen's Road Central and Canton Road are the second costliest for retail space. [3]
This is due to what is informally known in Hong Kong as a "high land price policy".
The mirror image of this policy is, inevitably, inequality. Hong Kong boasts some of the world's top billionaires, such as Li Ka-shing, the Kwok brothers and Lee Shau-Kee. At the same time no less than 18% of the city's seven million residents lived below the poverty line in 2011 - which was measured as HK$7,000 for a three-person household per month, according to the Hong Kong Council of Social Service. [4] About 100,000 people lived in dreaded cage or cubicle homes last year. [5] This may be a sensationalist approach, but the photos do tell the story. [6]
For all the glitz and glamour that dazzle not only global tourism but also, especially, mainland Chinese tourists, the median monthly income of a local household with four members is approximately HK$14,000, according to the Hong Kong Council of Social Service.
After a lengthy battle, a new minimum wage was approved. There were rivers of speculation on what would be a decent number - from HK$30 to HK$35 an hour. The approved figure in May 2011 was a paltry HK$28.
After the 2008 global financial crisis, Hong Kong's much vaunted economic recovery is essentially based on revenues from Chinese tourism and property investment. A trickle-down effect is not exactly in place; it's more like "rental-push" inflation, as Hong University researchers call it. Mainland Chinese gobble up at least 40% of new home sales. No wonder; property investment qualifies as the easiest path to get a much coveted Hong Kong resident card.
The land of the free
For the Heritage Foundation is a matter of routine to rank Hong Kong as the freest economy in the world - with a whopping overall score of 89.9 compared with a world average of 59.5. [7] This Milton-Friedmanesque paradise is extolled for "small government, low taxes and light regulation".
Much is made of "business freedom" and "labor freedom". True - you can open a business in three days; you just need a Hong Kong ID, a form and US$350. But depending on the business, you will be squeezed by monopolies and oligopolies in no time. And if you are "labor", chances are in most cases you can only aspire to some sort of glorified slavery.
Heritage researchers may be excused for losing the plot between dinners at the Mandarin Oriental and partying in Lan Kwai Fong, both favored drinking and dining spots near the central business district. Behind all those luxury malls and the best bottles of Margaux, real life Hong Kong has absolutely nothing to do with a free economy encouraging competition on a level playing field. It's more like a rigged game.
The dark secret at the heart of Hong Kong is the unmitigated collusion between the government and a property cartel - controlled by just a few tycoons; the Lis, the Kwoks, the Lees, the Chengs, the Pao and Woo duo, and the Kadoories (more about them on part 2 of this report). These tycoons and their close business associates also happen to dominate seats on the 1,200-member Election Committee that chooses Hong Kong's chief executive.
The first thing to keep in mind is that for any Chinese, land is wealth. That's sacred. And nowhere else this is more sacred than in Hong Kong.
Alice Poon is - or used to be - an insider; she was a personal assistant to Kwok Tak-seng, the legendary founder of Sun Hung Kai Properties, Hong Kong's giant developer. She also worked for the Robert Kuok group, responsible for land and property evaluation and acquisition. She now lives in Canada and blogs at the Asia Sentinel. [8]
In Land and the Ruling Class in Hong Kong (Enrich Professional Publishing, Singapore, 2011), Poon demonstrates how the Heritage Foundation's hard-on for government laissez faire is in fact mixed with an extremely non-competitive business environment. It all boils down to who really runs the show in Hong Kong; a group of cross-sector corporate giants controlling the property market, electricity, gas, the public buses and ferries, and the supermarkets (see them in detail in part 2 of this report).
The common denominator is that virtually all of them started with property - and then progressively gobbled up utility and public service companies.
Here are just a few examples of this cross-sector frenzy.
Cheung Kong Holdings buying Hutchison Whampoa in 1979 - a monster conglomerate involved in myriad businesses, among them the Park'n Shop supermarket chain.
Sun Hung Kai Properties controlling the Kowloon Motor Bus operator.
Lee Shau-Kee accumulating shares in The Hong Kong and China Gas - the town gas monopoly - before the company was listed in 1981.
Hutchison Whampoa buying Hongkong Electric - one of the two electricity duopolies - in 1985.
New World Development being awarded the Hong Kong public bus routes franchise in 1998 and buying Hong Kong Ferry in 2000.
The Pacific Century Cyberworks (PCCW) takeover of Hong Kong Telecom in 2000, masterminded by Richard Li, the younger son of Cheung Kong Holdings chairman Li Ka-shing, the wealthiest Chinese in the world.
The bottom line is that major utilities and public services are in the hands of just a few players; the Lis of the Cheung Kong/Hutchison group; the Kwoks of Sun Hung Kai Properties; the Lees of the Henderson group; the Chengs of New World Development; the Pao and Woo of the Wharf/Wheelock group; and the Kadoories of the CLP Holdings group.
Today, there are 49 constituent companies in the Hang Seng Index, which represent nearly 70% of total capitalization of the Hong Kong Stock Exchange. Taking away heavyweight Chinese state-owned enterprises such as China Mobil, China Unicom, PetroChina, Sinopec, ICBC, China Construction Bank, Bank of China, China Life, etc (which account for more than half of the total capitalization), and Britain's HSBC, the Hang Seng Index is dominated by local companies of property development tycoons such as Li Ka-shing's Cheung Kong Holdings, Hutchison Whampoa and Power Assets; the Kwok family's Sun Hung Kai Properties; Lee Shau Kee's Henderson Land Development and Hong Kong and China Gas; as well as other property developers such as Sino Land, New World, Hang Lung Properties, and Warf (Holdings).
This amounts to roughly six families controlling virtually all of Hong Kong's economic sectors. And it will stay like this. The Chinese tradition of passing the family fortune from generation to generation amounts to what Poon derides as an "antiquated feudal system".
There's nothing "free market" about Hong Kong's major utility/public service companies. On the contrary; they are monopolies or oligopolies. The two supermarket chains - Park'n Shop and Wellcome - have no less than 70% of market share. City Super is owned by Japanese - but that's an upscale brand, with only a few locations, and out of reach for most Hongkongers.
Park'n Shop and Wellcome consolidated their dominance essentially by pricing smaller companies out of the market; they could easily afford it. Park'n Shop is the retail/food division of A S Watson, which is part of the Hutchison/Cheung Kong conglomerate. Wellcome is part of the Jardines/Hong Kong Land group. So no wonder, for instance, a Park'n Shop outlet is in or around every building developed by Hutchison or Cheung Kong.
A measure of their power is that France's Carrefour - the second-largest global supermarket chain - tried to break into the Hong Kong market in 1996. They gave up four years later.
Born to lose
We should be back again to a Chinese maxim: land is power. All the conglomerates controlled by Hong Kong tycoons are fattened on owning land. The local government is the sole supplier of land. So no wonder it keeps a vested interest in the property market - and that's a huge understatement - as it pockets fortunes from land sales and premiums on so-called "lease modifications".
As for the maxim that prevails across the city's property market cycles, it's always been the same: "Buy low and sell high".
This doesn't work for the public good - to say the least. A good example is the Guangzhou-Shenzhen-Hong Kong express rail link, which is bound to be the most expensive in the world, costing US$8.6 billion - partly because of choosing to build the terminus at West Kowloon. There was a cheaper and perhaps better alternative - to build the terminus at Kam Sheung Road on MTR's West Rail. But it was overruled because of, as some critics suspected, shady land speculation interests in West Kowloon.
The whole situation is in fact inherited from the British colonial era, when the British hongs such as Jardines, Hong Kong Land, Wheelock Marden, Swire and Hutchison controlled Hong Kong's economy - and prime urban space. This Holy Grail was beyond the reach of Chinese companies.
But then, from the late 1960s up to the mid-1970s, the hongs started to get rid of their land and property as China plunged into chaos during Mao's final years. At the same time, Cheung Kong, Sun Hung Kai, New World Development and others started using the stock market to raise funds.
But it was only by the mid-1980s that British companies were finally gobbled up by the likes of Li Ka-shing and Y K Pao. When the Sino-British Joint Declaration was signed in December 1984, sealing the 1997 handover, they finally hit the jackpot.
The champagne popped all around Paragraph 4 of Annex III of the Joint Declaration; it limited the amount of land that could be granted in Hong Kong in any one year to just 50 hectares. That also paved the way for a Land Commission, which could grant extra land when the ceiling was attained. Essentially this set up guaranteed that land in Hong Kong would always be in short supply - thus it would always be expensive. Ergo, the perennially high property prices.
The mantra of the previous two Hong Kong administrations under "one country, two systems" - by Tung Chee-Hwa and Donald Tsang - was not to deviate from a high land price policy; keep a tight land supply; and postpone the introduction of a competition law (more on this on the second part of this report). There's no evidence this would change much under new Chief Executive C Y Leung.
The absurdly high rents in Hong Kong - derived from high land prices - hurt most of all local businesses, and prevent Hong Kong from attracting more foreign investment. If Heritage Foundation researchers didn't get it, they were probably researching some island in the South China Sea.
Everything that revolves around land represents the main underlying cause for industrial and economic concentration in Hong Kong. When property prices and rents are that high, they contribute to high living and business costs. Wealth disparity gets out of control - the key popular grudge of anyone who is not a millionaire in Hong Kong. [9]
The average Hongkonger - whose median household monthly income is US$1,800, much less than our fictional Mr and Mrs Chan - not only is bound to lose in the property game but also gets to pay high prices for basic daily necessities.
Hong Kong's very simple tax structure - 15% for individuals, 16.5% for corporations - may have been OK for its early stages of economic development. Now that Hong Kong is relatively wealthy in annual GDP per capita terms (over US$45,000), but with a large proportion of its population living below the poverty line, it doesn't make sense anymore.
It's enlightening to note that this average annual per capita GDP figure is double the annual household income of an average Hongkonger.
The bottom line points to a fact that should make the local ruling elite - not to mention Beijing - quite uncomfortable. Without a real democratic government, elected by Hong Kong people, there's no way Hong Kong will ever reform its land and tax system. The "freest" economy in the world will continue to be a battle pitting a wealthy oligarchy against a large majority essentially struggling for survival.
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