Behind the Arrests of Hong Kong's Property Tycoons

The March 29 arrest by Hong Kong’s Independent Commission Against Corruption (ICAC) of a former government chief secretary and two of the Kwok brothers, among Asia’s most powerful property developers who control the giant Sun Kung Kai Properties concern, was a stunning development.

The implications are as yet unclear, although it appears to hand Chief Executive-elect Leung Chun-Ying a golden opportunity to clean up a sector long believed to be uncomfortably close to the government. Leung is already viewed with alarm by the property oligarchs. If two of their most stellar members have been arrested less than a week after Leung was given the job, it gives him additional cachet with the community to start to clean the stables and seek ways to moderate housing prices, among the highest in the world.

The former government official, Rafael Hui, not only occupied the number two post in government for several years until 2007, but he was particularly close to Chief Executive Donald Tsang. He is the most senior official ever arrested by the ICAC. The Kwok brothers are the most high profile arrests of business figures since the Carrian scandal of the early 1980s which saw the arrest of its boss George Tan and several associates and various corrupted bankers.

The investigation is said to center on Hui, who allegedly disclosed confidential information to helpful to Sun Hung Kai pertaining to certain parcels of land. Former Sun Hung Kai Executive Director Thomas Chan was arrested on 19 March. Four others have been arrested in connection with the case, although they are not believed to be either Sun Hung Kai staff or high level government officials.

At one level the latest arrests are very surprising. The public has long believed in the existence of collusion between the government, which controls land supply and development policy, and the top six or so developers who dominate the property market. Nine of the ten richest people in Hong Kong are in property. Developers are known to have close links with officials, some of whom later benefit by retiring early and taking well-paying jobs with the developers. Land use decisions and sales procedures have often been seen to favor them at the expense of smaller developers and the public. However, corruption is easily disguised and hard to prove.

In the Kwok case however, strong leads for the ICAC appear to have come from a third brother who fell out with his siblings a few years ago and who was removed from the board. Another director of SHKP was also arrested earlier and may have provided additional leads. Hui’s past links to the company when he was in the private sector were no secret, but presumably there is now evidence either of payments or other advantages in return for information or favorable decisions when he was Chief Secretary for Administration.

However, it seems more than possible that none of this would have reached he arrest stage if Donald Tsang himself was not a lame duck, even facing investigation himself in connection with a large property in neighboring Shenzhen and acceptance of almost free rides on private yachts and planes from tycoons. The ICAC reports only to the chief executive who has thus had the final say in prosecutions leading to suspicions in the past that big fish would be allowed to go free to avoid wider scandals leaving the ICAC to focus mainly on low level corruption by petty bureaucrats and police. The ICAC has mostly been headed by a rising bureaucrat whose career might suffer from stirring up too much mud.

The arrests thus may be indirectly connected to Tsang’s own weak position and an ICAC emboldened by the victory of CY Leung in Sunday’s selection process for the next chief executive. Leung is viewed as unsympathetic to the developers – as a property surveyor he knows all too well the potential for manipulating the system.

Hui must have had some inkling of an investigation well before the selection in which he participated as one of the 1,200 electors. He had run Tsang’s campaign five years ago and was widely expected to do the same for Henry Tang. But he backed out at the last minute, leaving the Tang campaign rudderless.

It remains to be see what charges are laid and whether they can be made to stick – not easy without smoking guns such as obvious payments or emails evidence of collusion. But for the public they are at once a shock and an apparent confirmation of what they already believed. Given revelations over recent weeks about other sleaze at the top in government – the illegal palace underground at Henry Tang’s palatial home and Donald Tsang’s links with the Macau gambling fraternity and a Shenzhen tycoon in particular – the arrests can only add to pressure for greater transparency in government, in particular relations between officials and the place where big money is most easily made with the right connections – property development and megabuck infrastructure projects. The latter have been proliferating without much economic justification.

So Leung will start with high expectations that he really will be a new broom, sweeping away cozy old relationships and re-examining some of the mega projects. Whether he can fulfill popular expectations is another matter given how deeply rooted at the vested interests in the status quo.