George Chen

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

First, we were worried about inflation in mainland China. Now it seems Hong Kong’s inflation situation in coming months looks no better. I blame the worsening problem partly on the city’s first-ever minimum wage law, effective May 1.

As I study international political economy at the University of Hong Kong, my professor and classmates do know I am a free market fan and don’t believe a minimum wage will help Hong Kong’s economy and boost employment, as some Hong Kong lawmakers assert.

The sad truth is I went to buy my favorite Pearl Milk Tea on May 1 and found it was 2 Hong Kong dollars (about US$0.26) more expensive. Then I went to check out McDonald’s — prices for some of its burgers and drinks have also risen about 2-3 percent. And last night, local media said taxi and tram fares were going to rise in the former British colony too!

A friend of mine reported that the property management fee for his apartment building was going to increase about 30 percent, mainly because of the minimum wage law. Otherwise, the tenants may have to decide whether to lay off some staff to keep the management costs unchanged.

Local media said some small and medium-sized enterprises also planned to reduce headcounts in response to the minimum wage law. If so, Hong Kong’s economic growth may also take a hit.

Before the minimum wage law went into effect, some pro-democracy Hong Kong lawmakers insisted it would protect grassroots workers and help them fight inflations, but they may have forgotten that workers are also consumers.

Today they work and are slightly better paid, at least HK$28 per hour now. Tomorrow, they are going to buy food, ride the subway, and so on, and the price levels of all these services and products are apparently going to rise even faster than before, partly thanks to the rising human cost.

Why do I care about this? In short, I believe that what is happening in Hong Kong could happen in mainland China.

We’ve learned that several state-owned enterprises plan to increase staff wages in response to a call by Beijing for “redistribution and balance of social wealth” and to help the working class become more prosperous. Will people actually feel poorer in terms of individual purchasing power even though they are better paid?

About 450,000 people working for local restaurants in Wuhan, a second-tier Chinese city, now expect to see pay rises after recent tough negotiations between the local government and the city’s workers’ union, the official China Daily reported. If successful, those restaurant workers will earn at least 1,170 yuan (about US$180) a month. I hope the food prices on the restaurant menus won’t change too much.

If mainland inflation really climbs to 6 percent or more in the coming months, as some analysts have warned, I don’t think a national pay rise can match the pace of inflation growth. Meanwhile, we face the risk of seeing retail prices rise because of rising costs, including staff pay.

If consumers offer the final solution for companies to cope with the pressure from pay rises, will you be happy to see such pay increases take place? The dilemma between pay raises and worse inflation may be worth some serious consideration for investors’ money-making decisions.

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

Photo: A cabbage seller smokes a cigarette as he waits for customers at a fruit and vegetable market in Beijing in this December 17, 2010 picture. REUTERS/David Gray

By 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“.

Local 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

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

What happens in China will soon affect the whole world — inflation being a case in point.

Just last month we saw news that U.S. fast-food chain operator  McDonald’s had decided to raise menu prices in mainland China by 0.5-1 yuan. McDonald’s was fast to react to China’s growing inflation. Others may feel it’s already too late to raise prices because of the government‘s increasing price control policies.

According to an official announcement posted on a Kunming government website, one of the largest cities in southwestern China, five retailers including Wal-Mart and Carrefour have been ordered to report any price adjustments with clear reasons for the changes in advance, with the final decision in the hands of the local government.

The order is part of newly imposed temporary price controls to help Kunming fight fast-growing inflation. The notice said the controls would take effect immediately and remain in place until Feb. 28. I’m not sure how shareholders and investors of Wal-Mart and Carrefour will feel if news of the move spreads to Europe and the United States. French people are known for their deep love of freedom and now the two companies will have to think of ways to maintain profit growth in China as the cost of sales rises.

More importantly, how will you balance your economic interests in the short term and your relationship with the Chinese government in the long run? Even the CEO of Wal-Mart gets the point: it’s still a tough job to get investors on the same page, otherwise the share price might have to take a hit.

Kunming is not alone.

Soon after the State Council, China’s cabinet, asked mayors to take serious steps to address inflation, many local governments started work on policies to control prices.

In Guangdong province, one of the country’s richest, where local media have reported that three dairy makers raised retail prices for milk products by about 10 percent last week, the local government is also mulling similar policies. The powerful economic planner NDRC talked with major food product makers, asking them not to raise prices for daily necessities such as cooking oil for the next four months at least, local media reported.

China has applied price controls during previous bouts of inflation with mixed results. As my Beijing colleague Zhou Xin noted, in 2007, Lanzhou, capital of rural Gansu province, capped the price of beef noodles. Although the move was initially popular, some residents soon complained that restaurants had in turn cut portion sizes.

This round of price controls, from the central government to local government, level may last until the spring, when Beijing will hold the country’s most important annual political meetings, some analysts said. The controls should help Beijing cap the CPI level but it’s far from a sustainable situation.

Before foreign companies such Wal-Mart become frustrated, state companies such as COFCO, the country’s No.1 food importer and exporter, have already shown signs of impatience — some COFCO officials have privately complained that price controls will eat into profitability, and their employees will not be happy to see a smaller year-end bonus, local media reported.

The situation will be the same at other enterprises. Employees are also consumers. At the end of the day, who’s going to boost domestic consumption to maintain economic growth?

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

Photo: People carrying groceries walk along a street in Hefei, Anhui province November 18, 2010. REUTERS/Stringer