HKDF newsletter - 19 - Has Hong Kong Lost its Competitiveness?

In GDP terms, one minus one is equal to two. Stock market growth, in US dollar terms, is a better measure. You cannot fool the stock market for too long.

Stock market valuation
GDP growth was one measure of performance. However, Mr van der Kamp did not like it too much. The problem was that GDP did not take account of waste. You could, for example, build public housing, then demolish it and build a public carpark in its place, and all of this work would add to GDP growth, even though the net result was a diminution in economic value. In GDP terms, one minus one was equal to two.

Stock market growth, in US dollar terms, was a better measure. You could not fool the stock market for too long. Looking at the performance of the Hong Kong stock market compared with the rest of Asia ex-Japan, Hong Kong was the only market worth buying over the last twelve years. And if one took account of dividends, Hong Kong was even better.

Chart 2: Stock Market Indices, Weighted US$ Terms, 01/90 = 100

But was it all just the property boom? Mr van der Kamp asked. This was a common accusation made of Hong Kong. But one had to understand the issue. In economic terms, property was not just what was traded. What counted for GDP was the value of construction. Looking at the figures, only 8-1/2 per cent of GDP was accounted for by construction. Given that Hong Kong was an urban economy, this was not unreasonable. Hong Kong had not overdone it on property.

Trade
Was Hong Kong facing a trade slowdown? On the face of it, yes, said Mr van der Kamp. Hong Kong’s domestic exports had declined. And when the Multifibre Arrangement came to an end in a few years’ time, Hong Kong’s domestic textile exports which were protected by quotas, would vanish. But this would not matter because service exports were growing strongly. China’s exports were growing as a percentage of Asia’s total exports. And that was where Hong Kong’s services were going, said Mr van der Kamp.

Chart 3: Hong Kong Exports, HK$BN Annually

Chart 4: China’s Exports as Pct of the Rest of Asia

On container throughput, it had been the case some time ago that Singapore could boast the most active port in the world. But now Hong Kong was clearly ahead.

Chart 5: Container Throughput, Million TEU Annually

Was Hong Kong in debt to others? This was a problem for some other Asian economies. However, Hong Kong’s net external financial claims on other economies were currently high, at a level exceeding 80% of GDP. Others were in debt to us. And we had the strongest financial performance of any economy in Asia. There were virtually no bad loans. Hong Kong was better in this respect even than Singapore, and far better than Japan or Thailand.

Employment
What about unemployment? The point here was that employment had been increasing strongly; we had added about 180,000 jobs since the financial crisis began. The problem was that the workforce was increasing by even more – there were 35,000 more people available for work in the third quarter. We were getting 55,000 immigrants a year from China; most of them had no tertiary education, and many were construction workers. What Hong Kong needed was immigration controls so that it could choose workers with the talents that it needed.

Chart 6: The Jobless Picture, Million Persons

But weren’t wages going down? Nominal wages might be static or falling, said Mr van der Kamp, but because of deflation, real wages were rising.

What about tourism then? Wasn’t it the case that tourists just weren’t coming here any more? No it wasn’t the case: tourist arrivals were running at 13 million this year. No territory west of San Francisco received so many until you got to Greece. Admittedly these were mostly business people; but business was what Hong Kong was about.

Housing
Confidence was down said Mr van der Kamp. People were not buying the good news about Hong Kong that he was promoting. He suspected that the main reason for this was unemployment. It had more impact in Hong Kong than in the West because people were less used to it here. The other reason was probably housing prices. But here one had to be careful. Martin Lee had suggested that 300,000 people had negative equity in their homes. The Hong Kong Monetary Authority’s figure was 48,000. But Mr van der Kamp suspected that if one counted only owner-occupiers, and if by "negative equity" one meant a house price less than the outstanding mortgage (rather than merely less than the owner paid for it), the figure might come down to 30,000. In Hong Kong people paid their mortgages off rapidly, because they were expensive, and because there were a lot of repercussions for the individual from default.

Was Hong Kong property expensive? On a per-unit basis, for the average 500 foot flat in Sha Tin, prices were below New York or London. Admittedly this was not the case on a per-foot basis. The problem was that people in Hong Kong bought flats because they thought the price would go up, not because they thought that they were good value.

Chart 8: Housing Price Indices, Aug 1990 = 100, Currency Adjusted

Was there a building slump? There was definitely underbuilding, especially of offices. The problem was that the Government had supplanted the private sector.

The Government’s position in the property market had implications for its fiscal position too. This year, with falling receipts from land sales, the Government was heading for an HK$60 billion deficit. Expenditure was heading for a 10% increase while revenue was 10% down. All the revenue came from the sandwich class, so it was politically difficult to raise it. Expenditure was rising because the Government was getting more and more involved in everything. Thus the deficit was structural.

It was true that reserves were high. However the talk of HK$ 1 trillion was exaggerated. Net of liabilities the amount was more like HK$720 billion. This was a comfort factor that Hong Kong should not have. It could be spent to take us over a rainy day, for example in 1997. But you could not finance endlessly rising expenditure that way. And having the reserves made the Government think of wasteful projects, such as Disney, the Cyberport.

Cartels
Another implication of greater Government involvement in the economy was that the free market was not allowed to work. The public sector was now very big and rule-imposing. This allowed price cartels to flourish everywhere, for example in meat imports, taxis, property, cross-border shipments of goods. So Hong Kong people were cheated of the benefits of competition. We were cheating ourselves. The Government had arrogated power to itself and was not protecting the consumer from private sector interests.

An example was the reinterpretation of the Kowloon Motor Bus scheme of control (SOC). Previously, the SOC had operated in accordance with a simple set of rules. Everyone knew what to expect. But now there was a modified basket of factors to be taken into account. This was opaque, and in practice KMB's pricing was now a matter for the Transport Secretary to decide. So the mechanism had become politicized.

You had the very strange situation in Hong Kong of an elected legislature acting as the opposition. And the Civil Service was acting as the Government, in the mandarin tradition. There was no accountability of Government to the people of Hong Kong.

Was lack of democracy a hindrance to Hong Kong’s economic development? Democracy was only part of civil liberties – a free market and free speech were also important. Basic civil rights in Hong Kong were fairly well protected. One only had to consider the case of the Falun Gong.

Would it help to have competition legislation and a Consumer Protection Authority? This would mean still more Government. But something really had to be done. Recently, the real estate developers had said that they would not buy government land in order to prop up the property market. A statement like that would get you five years in jail in a lot of jurisdictions. In every area of the Hong Kong economy there were two or three people who controlled prices.

Mr van der Kamp confessed that he owed his allegiance to the libertarian tradition. Smaller government was best – looking after public order, health, civic functions. The less the better. Unfortunately, Hong Kong was going the opposite direction, getting more and more government with Disney, the IT initiatives, the Small and Medium Enterprises Fund. This last, the fund for small businesses, was just an invitation to sharks.