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Crowded in or crowded out? High and low-rise Hong Kong

Early in his ill-fated campaign to become Hong Kong’s chief executive, Henry Tang told the city’s young people to stop complaining about property prices. Local tycoons were not born with billions of dollars, pronounced the magnate turned politician in a news­paper interview last year. Those unhappy about the success of Asia’s richest man should ask: “Why can’t I become the next Li Ka-shing?”

The response – in a city where the median home price is 13 times annual average household income, the highest multiple in the world – was derision. Just months before, a Catholic priest sparked a furore on Halloween by saying: “Ghosts and spirits are not scary. People like Li Ka-shing are the real man-eating devils.” Both incidents highlight a widening inequality that is generating anger among ordinary residents. Many feel a cosy relationship between government and business in one of the world’s most liberal economies is benefiting a handful at the expense of the bulk of the city’s 7m-strong population.

Leung Chun-ying, the man who beat Mr Tang to office in March, says he will change this. He has promised a more interventionist government that can make life better for the vast majority by supporting smaller companies and making housing more affordable. Backers of big business, however, worry that he will hurt the free market model that has turned Hong Kong into a leading financial centre. Either way, on his success hangs Hong Kong’s future as a leading financial centre.

Property has long been the key to economic power in Hong Kong. The British government put in place a system where most public expenditure in the colony was paid for by proceeds from land sales, allowing the city to become the low-tax regime favoured by global investors. For decades, the business landscape has been dominated by the four biggest property developers.

Since the handover to China in 1997, the government has kept to the same policy. As the sole freeholder of land it sells leaseholds at high prices, making them affordable only to developers with very deep pockets, who transfer the cost to home buyers. Because it has until recently refused to increase the supply of land, property prices have climbed more than 70 per cent since 2009. This has been compared by local residents – who have gone from typically spending about a third of household income on housing to nearly half – to de facto high taxation. Average income tax, the primary levy in the territory, is 17 per cent.

Three events in the past two months suggest the golden age of tycoons is under threat. First it emerged that an illegal basement with a vast wine cellar had been built beneath the home of Mr Tang, initially Beijing’s favoured candidate. This stirred up anti-tycoon sentiment, ultimately handing victory to Mr Leung, with his grassroots background, who takes office on July 1. Public opinion swayed the decision of an election committee of just 1,200, or 0.02 per cent of the population, selected mainly from the business and professional elite. It also influenced Beijing; though China has no official say, some of the committee say it made its choice known to them.

Then, last month, the Kwok brothers who head Sun Hung Kai Properties – Asia’s largest developer by market value – were arrested for suspected corruption in an investigation also involving a former senior official.

It may seem curious that tycoons have gone from role models to reviled. Hong Kong’s free-market reputation, intact 15 years after its return to China, has been a keystone of its economic boom. Unemployment is a mere 3.4 per cent and the economy has grown 17 per cent over the past two years. The government has US$285bn in reserves – almost as much as Indonesia, a country with 240m people. Per capita gross domestic product is about US$35,000,

But the fruits of prosperity have gone to a small group. The bottom 10 per cent of households ranked by income make less even in absolute terms than 10 years ago. The city, according to a UN study, has the developed world’s widest income disparity, making it just a little less unequal than nations such as Ecuador and Cameroon. One in four children in Hong Kong live below the poverty line and the situation has not improved in the past decade.

“We all hear about the amazing growth in GDP, but none of us ordinary people feels the benefit,” says Cheung Yuet-ling, a civil servant in her 30s. “Average pay has not kept up with inflation and there is no end to the increase in rent and property prices, which suck up most people’s income. It’s the big developers who get richer and they are not sharing with the rest of us.”

Not for much longer, according to the incoming chief executive. In his first interview with foreign media since his victory, Mr Leung said Hong Kong must pull away from a “small government, big market” model, and that he would address imbalances in the economy and make companies “pay for their costs to the community”. Though details remain scarce, proposals include forcing business to provide more subsidised housing.

If his more hands-on government can improve the lives of the thousands of families packed into dangerous and often illegal cubicles, known as “cage homes”, without harming economic growth, Mr Leung will knock a hole in the non-interventionist model laid down by Sir John Cowperthwaite, the city’s financial secretary, in the 1960s. Treated as sacrosanct by successive governments, it prompted economist Milton Friedman to write an article entitled: “If only the US were as free as Hong Kong”. If Mr Leung takes his campaign too far, critics say, the city will lose ground to Singapore and Shanghai as wealth and power shift to the east.

Mr Leung has close ties to China. Years before handover, he started building ties with mainland officials and, by the time he was in his 30s, in the 1980s, he had been appointed by Beijing to a powerful committee that drafted the territory’s constitution.

Some in Hong Kong’s business elite describe him as “a dangerous communist” – though he denies persistent rumours that he is a party member – who could destroy the city’s free-market foundations, which have generated so much wealth. His strongest critics are close to the tycoons. “This is an earthquake, given the backdrop of the general feeling that the tycoons have had it too good for too long,” says a former senior police official.

Nothing illustrates this more than the arrests of Raymond and Thomas Kwok – who between them have a fortune estimated at US$18bn. They have not been charged and insist they are innocent. But their arrests by the Independent Commission Against Corruption on March 30, along with Rafael Hui, former head of the civil service, galvanised public anger about perceived government and business collusion.

This week Joseph Lau, another developer, has been asked to give evidence in a corruption trial in neighbouring Macau. In February, Icac launched a separate investigation into whether Hong Kong’s outgoing chief executive Donald Tsang received illegal favours from business people after local press reports that he travelled on yachts and private jets owned by tycoons. After stepping down, he had also arranged to move into a penthouse renovated by a wealthy developer but abandoned the plan in the face of mounting outrage.

In the small world that is Hong Kong, Mr Hui had been appointed to his civil service post by Mr Tsang. Mr Tsang’s brother, a former police commissioner, is a board member of an arm of New World Development, a property developer.

Many in business maintain that only big developers need worry about the plan to increase the supply of affordable housing, and that the tenets under which the territory has functioned will be protected. Christopher Pratt, chairman of local conglomerate Swire Pacific, says: “Hong Kong is still so useful a financial centre to the rest of the country” that Mr Leung is unlikely radically to change its free-market economy. Despite the rise of Shanghai as a financial centre, Hong Kong remains China’s biggest capital market because it has its own fully convertible currency and sound infrastructure.

Businesses engaged in industries outside property are hoping the chief executive will address a loss of competitiveness against Singapore in re­cent years. Hong Kong has lost its dominant position in sectors such as shipping and logistics. Commodity suppliers including BHP Billiton, Rio Tinto and Vale have moved the bulk of their shipping operations to Singapore, where there are tax incentives and other policies to boost the industry.

In a city the British took over in 1841 to provide a free trading port on China’s doorstep, business and government have always been close. Previously, says Leo Goodstadt, a policy adviser to the colonial administration, Chinese members of the elite were to some extent seen by the majority as a protector of their interests against the British. There is no longer the same sense of “them and us”, he says.

Grassroots disillusionment is linked to the fact that more than 90 per cent of GDP is generated by the services sector, especially finance – which offers few opportunities to those with little education and skills. “More business is moving to the mainland and there is no need to recruit in Hong Kong,” says Mr Lo, who has backed Mr Leung since early in his campaign, one of the few tycoons to do so.

Adding to the resentment is the fact that many tycoons receive most of their income from tax-free dividends. For example, the family of Raymond Kwok received dividend payments last year of HK$1.36bn ($175m) compared with his salary of HK$2.52m, making taxable income less than 0.2 per cent of the total.

Fears that Mr Leung’s ties to the mainland will threaten civil rights and the independence of the judiciary mean he enters government with a public approval rating of just 40 per cent. He needs to gain support before the next election in 2017, when universal suffrage is promised. That is being taken as a source of hope that he will deliver on his campaign promises to draw a clear line between government and business.

Whether it is Asia’s richest man or an elderly woman living in a poor neighbourhood, he says: “I am the chief executive of the Hong Kong people, and each person has a special meaning to me.”

香港迎来梁振英时代