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    China Business
     Aug 2, 2012

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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. 

    Continued 1 2  

  • One country, two (failed) systems (Jul 03, '12)

    Rent soars for Hong Kong cage dwellers (Sep 03, '09)

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