Threat to Hong Kong's International Status

Foreigners and mainlanders who live in Hong Kong are seeing that despite its still- abundant attractions it is becoming gradually less open to them, a blow to the territory's crucial role as the international center for the region and a magnet for the global financial and other industries.

The expatriate community, however, is on the receiving end of government decisions driven by a mixture of bureaucratic stupidity and ethnocentricity. Two recent ones stand out as damaging to the territory's role as an international business centre.

One is the decision to cut off the English Schools Foundation (ESF) from public funds. The ESF was set up to provide a subsidized education for English-speakers in line with the subsidy paid to independently managed - often by Christian and other religious groups - local schools. Hong Kong's most prestigious secondary schools almost all fit into the latter category, enjoying high standards thanks to the combination of government subsidy and the fees charged to mostly middle-class parents. Lower-income parents have to make do with government schools.

While the subsidy paid to independent Chinese schools has remained stable in real terms, that for the ESF has been gradually reduced and is now to be abolished. The grounds for this is that the ESF, following a curriculum different from that of local schools, is somehow a colonial relic of no relevance to Hong Kong today.

But this hides two prejudices ingrained in an upper-level, highly paid bureaucracy which itself is rich enough to send its children to any schools it wants. One is simply racial. The attack on the ESF is primarily aimed at those (mostly Asian) residents for whom English, not Chinese, is a first or second language.

Secondly it is aimed at local Chinese parents, many of whom hold foreign residence, who prefer an English-language education for reasons which include the fact that ESF schools are known to be less inclined to rote learning than local ones. The attack is another aspect of the attempt to make local education more "patriotic".

None of this will make much difference to the rich, or foreign bankers with generous education allowances, who either or already send their children to very expensive international schools or to ones overseas. But the huge hikes in ESF fees will be a major blow to middle-class people local and foreign, a real deterrent to foreigners setting up small business in Hong Kong, or large businesses which like to have international staffs to run regional or global businesses.

As it is, ESF schools are overrun with applications, a sad commentary on the education on offer from local schools. Indeed, such is the demand for non-local education that most all the expensive international schools - or at least those without a nationality qualification - have a surfeit of applicants.

There is no reason other than the prejudice and phony patriotism of the education department bureaucracy for ESF schools not to receive the same subsidies as directly aided schools, or one based on the cost per pupil of government schools. Their parents pay taxes like anyone else.

To make matters even more unfair, the government is subsidizing, through land grants and infrastructure costs, the establishment of new foreign schools such as an offshoot of the well-known English school Harrow. Unlike existing international schools, which cater to foreign residents of Hong Kong, these new foundations aim to attract pupils from outside the territory, particularly the mainland. They will charge very high fees and be beyond the reach of most current ESF parents.

Although English is an official language in Hong Kong, those residents who want an English-based curriculum are in many ways worse off than many foreigners. There are Japanese, Korean, French and German schools that receive support from their respective governments and offer streams in English as well as their own language. Likewise Australian, Canadian and Singapore nationals have their own subsidized schools.

But that leaves the much bigger group of assorted overseas Chinese, ethnic minorities such as Indians and Filipinos, and thousand of resident foreign nationals who could be Malaysian, Dutch, British or Nigerian deprived of the educational subsidies available to local residents who obey the curriculum orders of an arrogant and prejudiced education department.

Another recent government decision strikes at the heart of Hong Kong's business traditions - imposition of special stamp duties (transaction taxes) on non-residents. Originally applied to residential properties, it is to be applied to all. In addition to a special Buyers Stamp Duty there is an additional duty of properties held for less than three years. Furthermore, the government is also making available land for residential developments which can only be owned by permanent residents.

All this is supposed to bring down prices and as a result has not been widely criticized by politicians who do not seem to understand how markets work or how these measures not merely further distort already distorted markets in Hong Kong but are now a real deterrent to business.

Bizarrely the pro-government automatons who are supposed to represent the business community have mostly been silent even though the data shows that trading in the most affected property sectors has almost come to a halt. The protests of foreign chambers of commerce have been ignored.

Chief Executive C.Y Leung is supposed to understand the property market, having been a leading surveyor who acted for several of the major companies. But it seems he and his none-too-bright civil servants' belief that knee-jerk response to rising prices will take the heat of popular dissatisfaction off them. In reality high prices are mostly the result of ultra-low interest rates and years of government deliberate starvation of land supply, The measures send a clear message to outsiders, be they foreign or mainland: we only want your business and investment if we start with an advantage. It goes against 175 years of Hong Kong practice. It is not even very effective. Since the discrimination began, transactions and prices of luxury flats of the sort bought by rich mainlanders have stalled or even slipped. But prices of the smaller flats which most Hong Kong residents rather than outside investors buy have continued to climb.

The new taxes, which are in effect though the legislation itself is still pending, are also easily avoided by companies doing major transactions. If a property is held by a company and the company itself is sold it attracts stamp duty of just 0.2 percent. Thus, as corporate watchdog www.webb-site.com has noted, a transaction last week by which listed Emperor Group bought company owning the head office building of Wing Hang Bank in Central for HK$1.58 billion will face stamp duty of just HK$3.1 million compared with HK$134 million if the transaction had a been property sale from Wing Hang to Emperor. This kind of tax avoiding transaction is difficult to apply to purchases by small business and individuals.

Property taxation discrimination reeks of a mix of parochialism and incompetence on the part of the Leung administration and like the attack on the ESF displays a poor understanding of Hong Kong's international role. Unfortunately that is a natural consequence of a government run by a mix of lifetime bureaucrats and those like Leung whose professional and business experience is entirely domestic and who seem to believe that patriotism consists of making Hong Kong less foreign.