Hong Kong Pain

Back in January I wrote a post titled “The Inflation Beast” which warned about a menacing situation, but which probably didn’t draw much attention at the time. Unfortunately, that menace has now turned into reality and has caused widespread grievances in society, which may have in part led to a plunge in Donald Tsang’s popularity rating. Even more humiliating for the CE is that he had to take an earful from vice president Xi Jinping on the subject of inflation.

Here are the concluding paragraphs of that blogpost:-

“….Unrelenting price increases in basic foodstuff imports from the mainland, wanton price and rent increases (prevailing and potential) for commercial and residential properties as a result of negative real interest rates and of a rigged land system, expensive energy cost and hiked utility rates and public transport fares, all presage a higher-than-normal inflation rate going forward.

One does not need to be an economist to know that general price inflation is particularly hurtful to those with low and fixed income. But for self-serving pro-rich SAR government officials, inflation may be more of a blessing than a curse, as it hurts the poor but not the rich and so there is no need for government to lift a finger. Governments in economically advanced countries on the contrary always put fighting inflation on the top of their agenda, as they know very well that it is the poor and vulnerable who deserve help most. The latest evidence can be found in the European Central Bank president’s decision not to follow the U.S. Federal Reserve Bank to cut interest rates, as he is committed to fighting inflation. But the SAR government will hide behind the pegged exchange rate system and say there is nothing they can do to tame inflation.

Perhaps stagflation is a real threat to Hong Kong’s economy after all. While Eldon cautions Asia to be prepared for whatever storm that might be coming, Hong Kong bureaucrats are obviously unperturbed by what worries Eldon.”

The Standard reported that Tsang is about to announce a HK$5 billion inflation relief plan for the grassroots. Why now and not earlier, not that it would make an iota of difference? The answer cannot be more obvious: because boss Xi had the good heart to mention the word ‘inflation’ to our CE during his recent high-profile visit.

But why wouldn’t it make a difference were the relief package announced earlier? Because in the case of Hong Kong, inflation is in major part a structurally caused problem that requires a long-term solution via policy reform. Short-term relief measures (such as those proposed by the various political groups or government) are at best palliative and cannot be expected to have any long-lasting effect at relieving chronic living-cost pain for the low-income group, much less curing the stubborn inflation symptom. Cosmetic measures, regardless of when they are taken, are not the answer to a structural problem. Government officials blaming the local inflationary phenomenon entirely on the global situation are either merely throwing a red herring or adopting an ostrich attitude.

How does market structure come into play in fostering inflation, as well as deepening inequities in society for that matter? I’ve explained this in my previous blogpost titled “Hong Kong’s Polarizing Fortunes”, which explains how the hurtful high land price policy has brought about deeply ingrained price distortions (i.e. persistent inflationary pressures) and a yawning wealth gap.

Indeed, structural price inflation is a more easily detectable symptom of permanent market distortions. In parallel but less visible though, and thus prone to being brushed aside, is the rapidly declining living standard silently suffered by the ever increasing numbers at the lowest social stratum living below the poverty line, which has lately swelled to 20 percent of the population.

Common sense would have it that a structural problem needs a structural solution. Admittedly the currency peg is part of the structural problem which leads to imported inflation, but given that it under no circumstances is to be tampered with (probably on orders from up north), no solution can be expected from this quarter. Regardless of this, the inequitable impact of a government-championed high land price policy leading to structural price anomalies and concentration of wealth in a few conglomerates could probably still be mitigated by a fairer and redistributive tax policy, were the SAR government an accountable and conscionable one.

But, as explained in my blogpost “Free Market and Fairness”, government uses the excuse of maintaining a so-called free market to disguise its unwillingness to redistribute wealth via conscionable and socially fair fiscal and tax policies.

Thus, short-term measures hurriedly put together only in obsequious response to a remark made by a senior mainland official can hardly be called sincere, let alone sympathetic to the plight of the populace or effective as a problem solver at all. Even a government source admits that the measures are likely to be only cosmetic and nothing substantial.

Besides, while the pro-government think-tank Bauhinia Foundation Research Centre is reportedly studying ways to tackle inflation, a glance at their website shows their latest publication as “A Tax System to Enhance the Business Environment”, which seems to say a lot about government’s priorities.