Opinion

George Chen

Two cities, one problem

By George Chen
January 5, 2011
Shanghai and Hong Kong are often considered twin cities from a historical and economic perspective, and the two cities do face many similar challenges. One of the most burning issues is the ongoing property struggle between the government, investors and developers in the two Asian strongholds of business and investment, and of course home to growing populations.
The Shanghai property stock index jumped more than 5 percent on Jan. 4, the first trading day of 2011 and the surge of Shanghai-listed property stocks gave a strong boost to the Hong Kong market. Given the bigger influence and impact of China’s economic development in Hong Kong since it returned to Beijing’s control in 1997, some traders often joke that the Hang Seng Index is like Shanghai’s mistress these days – your happiness depends on your master’s mood.
Usually, if the Shanghai market rises, Hong Kong’s benchmark Hang Seng Index will follow suit. When the Shanghai index falls, the HSI can fall further and faster. This week, Chinese property counters, trading at low valuations compared with their historical averages, mostly soared after local media reports indicated that the authorities could delay a new property tax because of disputes between the central, city and provincial governments, and property owners and investors.
Apparently, the new property tax issue in mainland China, which some in the market had expected to be implemented as soon as possible to further curb rising prices, is running into the typical bureaucratic holdups. On average, property prices in the four first top-tier Chinese cities – Beijing, Guangzhou, Shanghai and Shenzhen – rose more than 20 percent in 2010, according to local media reports, with Beijing recording the fastest rise of 42 percent on year.
It’s understandable for the Chinese government to seek to control property prices via tax, an old-fashioned solution that has prompted some analysts argue that China is becoming more like a command economy, rather than the market-oriented economy it claims to be.
More interesting, even Hong Kong, known as one of the world’s leading free markets, has drawn up a special bill to allow the local government to impose an additional stamp duty on short-term property transactions. So, what is a short-term property transaction from the viewpoint of the Hong Kong authorities? Buyers who sell within two years of purchase are considered potentially speculative.
The special bill has won the hearts of local residents who are struggling to climb onto the property ladder, even for less than 300 sq ft, but the bill also faces growing criticism and objections from market activists, developers, pro-business lawmakers and of course, property investors. The Donald Tsang administration announced the new property tax last November, but the bill is pending approval from lawmakers of the former British colony before it can be put to work.
Some activists and analysts believe the special bill will hurt Hong Kong’s image as a market-oriented free economy, which is the core reason Hong Kong remains a top destination for foreign investment. The Real Estate Developers Association of Hong Kong (REDA) issued an open letter to the media including Reuters last night saying the industry group supported the objectives behind the introduction of the new “Special Stamp Duty” targeting short-term speculation but was concerned the new rules would also affect “genuine home buyers”.
Last year, when Hong Kong implemented the city’s first-ever minimum wage policy, at least HK$28 per hour (US$3.6) for low-income workers, The Economist magazine published an article commenting that the introduction of a minimum wage “marks the further erosion of Hong Kong’s free-market ways”.
Let’s not be emotional. We know how poor Hong Kong people can be. Local friends tell me Hong Kong can be a nightmare for the poor but a paradise for the rich. The city is home to Li Ka-shing, who rose from poverty to become one of the world’s richest men, as well as the very poor who can only afford to live in a cage and eat twice a day.
For a very long time, the poor didn’t really resent or complain about the rich, partly because many traditional Chinese are what might be called believers in destiny. With the rise of the younger generation, the atmosphere of dissatisfaction is apparently growing in the city.
Technically and from a more academic perspective, moves such as the Special Stamp Duty on short-term property transactions and  the minimum wage policy could much to shake Hong Kong’s long-standing position as the world’s leading free market. Are we talking about capitalism or socialism for the future of Hong Kong’s economy?
If Shanghai, one of the richest cities in mainland China must take the route of so-called socialism with Chinese characteristics to develop its economy and markets, it will be interesting to see what Hong Kong does next to please both Beijing and global investors.

DonaldBy George Chen
The opinions expressed are the author’s own.

Shanghai and Hong Kong are often considered twin cities from a historical and economic perspective, and the two cities do face many similar challenges. One of the most burning issues is the ongoing property struggle between the government, investors and developers in the two Asian strongholds of business and investment, and of course home to growing populations.

The Shanghai property stock index jumped more than 5 percent on Jan. 4, the first trading day of 2011 and the surge of Shanghai-listed property stocks gave a strong boost to the Hong Kong market.

Given the bigger influence and impact of China’s economic development in Hong Kong since it returned to Beijing’s control in 1997, some traders often joke that the Hang Seng Index is like Shanghai’s mistress these days – your happiness depends on your master’s mood.

Usually, if the Shanghai market rises, Hong Kong’s benchmark Hang Seng Index will follow suit. When the Shanghai index falls, the HSI can fall further and faster. This week, Chinese property counters, trading at low valuations compared with their historical averages, mostly soared after local media reports indicated that the authorities could delay a new property tax because of disputes between the central, city and provincial governments, and property owners and investors.

Apparently, the new property tax issue in mainland China, which some in the market had expected to be implemented as soon as possible to further curb rising prices, is running into the typical bureaucratic holdups. On average, property prices in the four top-tier mainland Chinese cities – Beijing, Guangzhou, Shanghai and Shenzhen – rose more than 20 percent in 2010, according to local media reports, with Beijing recording the fastest rise of 42 percent on year.

It’s understandable for the Chinese government to seek to control property prices via tax, an old-fashioned solution that has prompted some analysts to argue that China is becoming more like a command economy, rather than the market-oriented economy it claims to be.

More interestingly, Hong Kong, known as one of the world’s leading free markets, has drawn up a special bill to allow the local government to impose an additional stamp duty on short-term property transactions. So, what is a short-term property transaction from the viewpoint of the Hong Kong authorities? Buyers who sell within two years of purchase are considered potentially speculative.

The special bill has won the hearts of local residents who are struggling to climb onto the property ladder, even for less than 300 sq ft, but the bill also faces growing criticism and objections from market activists, developers, pro-business lawmakers and of course, property investors. The Donald Tsang administration announced the new property tax last November, but the bill is pending approval from lawmakers of the former British colony before it can be put to work.

Some activists and analysts believe the special bill will hurt Hong Kong’s image as a market-oriented free economy, which is the core reason Hong Kong remains a top destination for foreign investment. The Real Estate Developers Association of Hong Kong issued an open letter to the media including Reuters last night saying the industry group supported the objectives behind the introduction of the new “Special Stamp Duty” targeting short-term speculation but was concerned the new rules would also affect “genuine home buyers”.

Last year, when Hong Kong announced the city’s first-ever minimum wage policy, at least HK$28 per hour (US$3.6) for low-income workers, The Economist magazine published an article commenting that the introduction of a minimum wage “marks the further erosion of Hong Kong’s free-market ways“.

LiLocal friends tell me Hong Kong can be a nightmare for the poor but a paradise for the rich. The city is home to the super rich, like Li Ka-shing, who rose from poverty to become one of the world’s richest men, as well as the very poor who can only afford to live in a box-like space and eat twice a day.

Li, born in the southern Chinese province of Guangdong near Hong Kong in 1928, fled to Hong Kong in the early 1940s to avoid turmoil on the mainland, just like all the other refugees. He was forced to quit school to work 16 hours a day at a local plastics trading firm to make a living before the age of 15.

Today, out of Hong Kong’s 7 million residents, it is said over 1 million of them are poor people whose household income is around 1,000 U.S. dollar per month, according to an unofficial survey backed by some local lawmakers. Many of them work very long hours every day, just like what Li used to do, in order to make that much.

I’m pretty sure one thousand dollar can get you a comfortable life in many rural cities in the mainland, but it means almost nothing in Hong Kong, one of the most expensive cities in the world.

For a very long time, the poor didn’t really resent or complain about the rich, partly because many traditional Chinese are what might be called believers in destiny. But with the rise of the younger generation, the atmosphere of dissatisfaction is apparently growing in the city.

Technically, and from a more academic perspective, moves such as the Special Stamp Duty on short-term property transactions and  the minimum wage policy may shake Hong Kong’s long-standing position as a leading free market.

If Shanghai, one of the richest cities in mainland China must take the route of so-called socialism with Chinese characteristics to develop its economy and markets, it will be interesting to see what Hong Kong does next to please both Beijing and global investors.

George Chen is a Reuters editor and columnist based in Hong Kong.

Photo (top): Hong Kong Chief Executive Donald Tsang attends a news conference following his policy speech in Hong Kong October 13, 2010 REUTERS/Bobby Yip

Photo (bottom): Hutchison Whampoa Chairman Li Ka-shing reacts as he attends a news conference in Hong Kong March 30, 2010 REUTERS/Bobby Yip

Comments
3 comments so far | RSS Comments RSS

Good article, thanks. I personally don’t think that HK will regress in terms of economic developments. Perhaps other areas, but not this.

Posted by Pin-ee | Report as abusive
 

It may be true that those policies imposed may apparently affect the so-called “free-market” of HK.

However, if the gov’t doesn’t do anything to support the poor in HK, those poor cannot maintain a necessary living standard and therefore i think the minimum-wage policy is necessary though it was still controversial.

Regarding the short-term stamp duty, emm…, i doubted it as well. It was basically copied from SG govt and try to curb the property price, but it may really give a bad image to investors.

Posted by billylo | Report as abusive
 

Once again, the news media fails in its responsibility and duty to the public by excluding from a report the difference between a market investor and a market speculator, or gambler. A real estate investor buys a property planning to hold that property for at least 20 years. Only a speculator or gambler buys a property with the intent of selling it within two years.

There is no similarity between the policies and laws any government imposes on investors, and the restrictions a government places on specuulators. They are two totally different sets of laws and regulations, created for two completely different groups of people, for two utterly different sets of reasons and requirements.

For the news media to equate investors and speculators, or gamblers, in the market, as if they were the same kind of people, is almost criminally irresponsible, so close to false news that it skirts the very cliff-edge of being legally actionable. It would only take one insulted investor who sued for libel and defamation, to start the snowball rolling down the mountain to wipe out the news media business sector around the world.

Posted by FirstAdvisor | Report as abusive
 

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