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How did Hong Kong's Oligarchs Get so Rich?
(This is excerpted from a speech to a Nov. 14 symposium on land monopoly in Hong Kong organized by the Politics and Public Administration Association of the University of Hong Kong. Alice Poon, who blogs regularly for Asia Sentinel, is the author of the highly acclaimed Land and the Ruling Class in Hong Kong. While it is carried on her blog to the right, we wanted to give it additional prominence – Eds.)
Hong Kong’s housing prices have continued to skyrocket in the face of all government efforts to hold them down, causing hardship for its residents and enriching a handful of oligarchs. The wellsprings of this go back almost to the birth of the territory as a British crown colony. How did it happen, and what are the consequences.
In the July 5, 2010 issue of the Hong Kong Economic Times, it was reported that Hong Kong's five leading developers together owned a total land bank of 1,279 hectares of land, which is three times the land owned by the government. It was also pointed out that four leading developers together own 1,000 hectares of agricultural land, which is equivalent to one-fifth of all agricultural land in Hong Kong.
Why are developers so 'addicted' to land? Other than the mentality of regarding something that's scarce as highly worthy of loading up, another vital catalyst that incites land addiction would seem to be the high land price policy that past and present governments have long been championing.
The policy is not one that was created by the SAR governments. Rather, it was first introduced shortly after the first colonial government was established upon the signing of the Nanking Treaty in 1842 to mark the end of the First Opium War. The first Hong Kong governor, Sir Henry Pottinger, designated the colony as a free trading port. Being a former British trade minister, he was naturally concerned with allowing British traders and businessmen to engage smoothly in their trading businesses.
However, the flip side of such a designation was that no import duty could be imposed. At the same time, the colonial government, being keen on garnering political support from British traders in Hong Kong, was deliberately aiming to keep corporate profits tax at a relatively low level. Given that Hong Kong was then still very much an economic backwater, the meager amount of profits tax was hardly sufficient to sustain the operation of the colonial government. The waiving of import duty was no help either.
Moreover, the British government then was too financially strapped to be able to look after Sir Henry's government. The first governor had little alternative but to turn to the only remaining and logical source of income - Hong Kong's land.
Auctioning off land lease rights to the bidder offering the highest amount of annual rent was seen as a way out of his government's financial blues. From then on, successive colonial governments have regarded land auctions and tenders as a cost-efficient and highly effective way of collecting much-needed tax revenue.
By the 1960s and 1970s, the incessant influx of refugees from Mainland China and the resultant demand for land and housing created a perfect opportunity for several Hong Kong developers to gorge on agricultural land in the New Territories as well as on so-called Letter B exchange lands. By this time, those shrewd developers had already gained a good insight into the weakness of the high land price policy, that is, that government itself has a vested interest in maximizing land revenue, that is, in keeping land prices high.
In other words, they realized that whenever the property market took a dip, the government would immediately rein in land sales, thus providing a cushion to the market, which meant that the market would always rebound after a short dip. Hence land hoarding was quite riskless.
On the signing of the Sino-British Joint Declaration in 1984, the psychological effect alone of the announcement of the annual land sale cap of 50 hectares was enough to give rise to a frenzied speculative mood in the trading of agricultural land, Letter Bs and properties alike.
In the past few decades, under the operation of the high land price policy, we have witnessed the following phenomena:
Against a backdrop of keen demand for residential and commercial land in the 1970s and 1980s, the few developer conglomerates that had earlier been on a land hoarding spree (including utility assets) were able to profit exponentially, with their tycoons acquiring world fame in wealth. The effect of their land hoarding is like the situation where bakeries have monopolized the supply of wheat flour and are thus able to manipulate the price of their baked goods. It is especially significant that they hoarded up agricultural land and Letter Bs, as the private banking of these has helped to distort the market critically.
In respect of agricultural land, those land hoarders have been able to achieve relatively low land cost through a land conversion procedure, because they can choose to negotiate with government on the conversion premium at a time when the market is at a low point. Compared to other developers who do not own agricultural land and who have to bid competitively at auctions, they obviously have the upper hand. As of today, this skewed land market is still a major distorting factor in the overall property market.
As for Letter Bs, this is a historical factor that ceased to exist as of July 1997. But in the 1980s, most Letter Bs fell into the hands of four developers (Sun Hung Kai, Henderson, Chinachem and Nan Fung). As the colonial government was obligated to redeem all outstanding exchange lands before the sovereignty handover, it had to offer most land scheduled for auction for the exclusive tender by those four developers in the years from 1984 to 1997. In other words, most land offered for sale during those 13 years ended up in the pockets of those Letter B owners.
While the high land price policy has helped to create a few economic Goliaths, on the other hand, it has caused immense pain to society as a whole.
On the economic level, since a preponderant portion of society's resources and energy have been invested in the real estate market, Hong Kong's economic base has been narrowing further and further over the past decades, with many previously vibrant industries dying out, leading to a dwindling of job species. In respect of housing, Hong Kong is one of the world's most expensive places to live, while Hong Kongers have had to put up with ever declining quality of accommodation.
The already dire situation has taken a turn for the worse in the past 10 years. The inflow of Mainland capital has been an added impetus in driving an already exuberant property market into uncharted territory. The drastic cut in the supply of residential land and subsidized housing under the Tsang administration has skewed further the overall housing demand/supply imbalance. Many from the low-income group have been forced to live in unsafe subdivided flats while a lot of middle-class professionals find home-ownership a distant dream. Retail shop rents have recorded explosive growth, with rent increases easily doubling and trebling within short periods of time. Many of our favorite small restaurants and shops have met with their unwarranted demise. Consumer good prices have rocketed along with crazy rent increases. Those who own properties are becoming ever richer, while those who don't are in danger of being decimated.
Let's take a look at what the high land price policy has to do with tax revenues. At present, almost half of government's annual budget income comes from land sales and lease modification and other land- or property-related taxes. Thus, from the government's standpoint, keeping the high land price policy intact is not only rational, but downright desirable. But given the daily exacerbation of a plethora of social and economic problems that have arisen directly or indirectly from the policy, is it not time for society to ask a serious question: is the policy one that truly serves the common good?
There is one peculiarity in the handling of the land-related tax revenue, and that is, all land sale income is automatically transferred into a "Capital Works Reserve Fund" each year (this practice dates back to 1982), and this fund is designated for the exclusive use in infrastructure-related projects.
Such a practice not only prevents this vast amount of tax (which is a form of heavy hidden tax shouldered by all home-owners) from being used flexibly in areas like education, medical services and social welfare, but it actually serves to augment land values further, thus benefiting mostly those land-rich conglomerates. Hence a vicious cycle results.
One crucial question we need to ask is: does government really have no choice but to rely so heavily on land sale income for its fiscal health?
Many types of new taxes can be looked into. These include capital gains tax, wealth tax, dividend tax, a more highly progressive salary tax, and even the reinstatement of the estate duty. The basic underlying concept is that those who are more financially capable should bear a bigger tax burden. Hong Kong is already a very wealthy society and its critical problem is one of unfair wealth distribution. These types of taxes can address that problem squarely and are the only way to narrow the yawning wealth gap.
But any meaningful reform to the tax system aiming to curb government's reliance on land revenue will hurt the deeply entrenched property cartel most, and these vested interests also happen to wield huge political power. It goes without saying that suggestions for reform will only meet with stiff opposition. Still, we should remember and take courage in what Mark Twain once said: "Reflection is the beginning of reform." If only we are willing to ask questions and give our thoughts to prevailing problems, we have already taken the first step.