Hong Kong’s Hollow Leadership

Mar 8, 2013 Sin-ming Shaw

Hong Kong Chief Executive Leung Chun-ying has been dogged by scandal from his first days in office, his personal integrity is routinely impugned by much of the press, and his popularity is plummeting. He has only himself to blame.

HONG KONG – Hong Kong Chief Executive Leung Chun-ying has been dogged by scandal from his first days in office, and his personal integrity is routinely impugned by much of the public. So it is no surprise that his popularity is plummeting.

Leung has only himself to blame. He seems incapable of connecting with ordinary Hong Kong citizens, instead coming across as a shifty politician who often dodges direct questions, offers vague answers, and evades responsibility for major failings by apologizing for minor shortcomings.

Leung staked his reputation on being able to tame Hong Kong’s absurdly inflated property market, and has failed miserably. Indeed, Hong Kong is now the most expensive city on the planet. It takes at least 13.5 years of mean household income to buy an average flat, according to one recent international survey. The comparable figure for London and New York is 7.8 years and 6.2 years, respectively.

To continue reading, register now.

Subscribe now for unlimited access to everything PS has to offer.

As a registered user, you can enjoy more PS content every month – for free.

Already have an account? Log in

Introductory Offer: Save 30% on PS Digital

Subscribe now to gain greater access to Project Syndicate – including every commentary and our entire On Point suite of subscriber-exclusive content – starting at less than $5 per month.

Subscribe Now

new comment has been posted. new comments have been posted.

0 Comments on this paragraph, 8 Comments on this article

Sin-ming Shaw Mar 13, 2013

Correspondents wishing to engage in a meaningful discussion as to whether HK's "linked" exchange rate system is "good" for HK should familiarize themselves with how the system functions.

Specifically in what way it is different from the Currency Board from which it was derived and why it is a better or worse system than the Currency Board. In that enquiry they should understand how each works.

Second, they are advised to re-visit (if they had studied international economics in university) Milton Friedman's Essays on Floating Exchange Rate and the Mundell-Fleming model.

Third before they launch specious rebuttals they should read my comments with a bit more care.

Here is the exact quote: "Regarding the HK dollar peg. No one remotely intelligent has claimed changing the peg is THE answer. It is certainly a partial but very important answer".
- Rob Gvozden Mar 13, 2013
  
  None of which answers my criticisms of your article or illuminates my rebuttal as misleading.
  
  You have characterised the HKD peg to USD as an "antiquated...colonial relic" that acts as a "roadblock" to the HK government's attempts to deflate property prices. Yet you make no attempt to explain how the linked exchange rate system's provenance is relevant to your statement. You don't assess the cost/benefit tradeoff of ditching the peg in favor of a floating exchange rate as a means of demonstrating your case. Rather you blithely cast the peg in the role of villain and then depart the stage without revealing why the peg must go.
  
  I am suggesting that advocating a floating HKD exchange rate to stanch capital inflows and attenuate their effect on real estate prices in HK is a misdiagnosis. According to BIS data, the HKD REER is about 5.8% below its post-crisis peak of March 2009. The latest Cline and Williamson estimate of the HKD FEER (piie.com/publications/pb/pb12-23.pdf) shows a 7.6% undervaluation in real effective terms. It is not only the nominal exchange rate that is low but relative inflation as well, in spite of whichever asset price increases you allude to. The data do not support your inference about a rising HKD real exchange rate as a consequence of the peg.
  
  From this inauspicious basis you have proceeded to ignore the impact of central government policies on capital flows into HK, and the HK government's structural dependency on property-related revenues on its policy reaction function. Instead of addressing my criticism that these are substantive issues you have denigrated my education, attention span, and intelligence. What's next, the ethnic origin of my surname?
  
  If you prefer to avoid issues of substance and stick to theory then please talk about what Harrod-Balassa-Samuelson predicts will happen to nominal wages in the heavily trade- and service-oriented HK economy if the nominal exchange rate floats, appreciates, and there is no corresponding upward adjustment to labour productivity. The fallout could make property affordability concerns look like small beer.
  A new reply to this comment has been posted.
A new reply to this comment has been posted.
Rob Gvozden Mar 13, 2013

The "high rate of asset inflation" in HK is a specious argument against the linked exchange rate system.

Real estate and housing prices are the specific assets you are referring to; financial asset prices have moved roughly in line with other markets. Multiple factors are behind those property price movements including Chinese capital account restrictions (or increasing lack thereof), structural change in the Chinese real estate market, and the HK government's dependency on revenues generated from land sales and redevelopment.

You have given not so much as a nod to the prevailing -- and valid -- economic rationale for the HKD peg. Yet you highlight Hong Kong's heritage as a trading economy, where in 2012 total trade of goods and services was 546% of nominal GDP. It is plain to see that such an economic structure will leave a floating exchange rate (in its identity as the price ratio of tradables to non-traceables) to be determined by the external sector. If from this premise you do not think the stability of a currency board appropriate to protect the 25.9% of GDP (2011) contribution from the trading sector and the 16.9% contribution from the financial sector, one may easily conclude that you are arguing for populism at the expense of long-term economic success.

I think your case against the peg is weak one. In the late 1980s inflation bubble before the June 4 event, mainland Chinese favored gold watches (often purchased in HK) as a store of value. Today they favor apartments in HK whose property rights are unambiguous and protected by law. This preference is amplified by what westerners like to call "financial repression" including a lack of access to high quality fixed income investments and limitations on overseas financial investments that could substitute for HK apartments as a diversification tool. The HK government itself could have done much more to push the Tsang administration's attempt to introduce a VAT and reform the land auction game. And the HK government's belated intervention in property transactions via frictional taxes (stamp duties) could have been undertaken much earlier -- for better or for worse. Trying to pin the result of these various policy stances and the current macroeconomic environment on the linked exchange rate is a stretch beyond credibility.
A new reply to this comment has been posted.
Sin-ming Shaw Mar 12, 2013

HK Gas is indeed part of the empire of the other Mr. Lee -- Lee Shau Kee.

Thus Lee is listed in Forbes as the 24th richest in the world whose net worth was put at US$20.3 billion versus Mr. Li Kashing's $31B, the 8th richest in the world. Mr. Li controls HK Electric while Mr. Lee controls HK Gas. My mistake.

Regarding the HK dollar peg. No one remotely intelligent has claimed changing the peg is THE answer. It is certainly a partial but very important answer.

Once the dollar is de-pegged and is allowed to float and once HK's Monetary Authority became a true Central Bank -- a companion change to the de-pegging -- then HK's interest rates and money supply are no longer a direct consequence of what the Fed does.

Only then HK's new Central Bank will gain a tool to tame asset inflation. The current administrative measures will show to be self-defeating.

The issue is not whether "sane" politician or bureaucrats would risk their career backing de-pegging, it is about whether keeping the currency board arrangement is in and of itself good or bad for the HK economy.

Intelligent people understand governments can only set nominal rates of exchange while the market sets the real rates.

Hence, asset inflation is what markets do. Volatility is what markets do. HK, precisely it is open and otherwise free, "eats" volatility for breakfast.

Even the PRC, historically a command economy, has allowed a much greater volatility in its exchange rate than Hong Kong.

Being an open economy is not an argument against a free floating exchange rate. Quite the contrary.

A revisit of Milton Friedman's essay on this topic is well worth the effort for anyone who wishes to think through the issue of floating versus fixed exchange rate followed by Mundell-Johnson's classic essays on the same topic.
A new reply to this comment has been posted.
Tommy Chiu Mar 12, 2013

1. The Gas company mentioned is NOT part of Li's empire. It is controlled by Lee Shau-Kee's family.

2. Moving the peg is NOT an answer for the situation of Hong Kong in the medium to long run. Notwithstanding the argument on the credibility of the new peg, which in itself is an issue, HK will suffer asset price inflation as long as it is pegged to the USD while the economic prospects of Hong Kong and USD remain divergent.

De-pegging it will introduce volatility to the exchange rate. Given the open nature of the HK economy, this may not be a good idea and no sane politician / bureaucrat will risk their career on the experiment.
A new reply to this comment has been posted.
Sin-ming Shaw Mar 12, 2013

A reader just informed me that the 1981 Ruling maybe challenged as shown by this case: http://blog.yahoo.com/_3SWRDKEHOKTTR3RK3V3YWNNSBE/articles/83499.

However, note the plaintiff was a Gas company, not a property developer. That latter group avoids offending the HK
SAR Lands Department by suing them.

Secondly, the said Gas company is part of Li Kashing's empire that has unlimited resources to engage the government in lengthy and costly legal process, not available to others.

Another private developer offered her experience in a desirable Hong Kong location:

"...I have direct dealings with the Lands Dept over a Saikung property; they are nothing short of bullies and behave as if they are above the law, which I now know they are!"
A new reply to this comment has been posted.
Sin-ming Shaw Mar 9, 2013

The following was a letter by a Hong Kong resident to the Editor of the South China Morning Post March 9:

"Repeated interventions in the Hong Kong property market by officials, particularly former chief executive Donald Tsang Yam-kuen and Financial Secretary John Tsang Chun-wah, have caused havoc for ordinary Hong Kong citizens.

First, Donald Tsang curtailed land supplies and instituted the land application system which favoured the large property developers.

The government then allowed mainlanders to flood into Hong Kong and seek residency by investing in property, pushing up demand. Meanwhile, the renminbi has appreciated against the Hong Kong dollar, importing inflation, and our property market has become a magnet for mainlanders, investors and speculators alike.

Meanwhile, officials have refused to reconsider the Hong Kong dollar peg, at the behest of property developers, who benefit from frequent boom-bust property cycles. A stronger Hong Kong dollar would help lower inflation and provide a natural tightening in the US Federal Reserve's loose money policy phase, helping to restrain the property market. This has not happened as the government continues to defend the peg.

Now, with a hot property market, more government intervention is the answer by John Tsang, imposing punitive stamp duties and increasing down payments for mortgages on buyers to curtail demand, causing transactions, but not the upward trend in prices, to slow down. Meanwhile, residential and shop rents continue to soar.

Past government intervention (to curtail land supply) has led to current measures (to suppress demand and increase supply). This will no doubt cause future intervention when the property market eventually crashes.

The problem is that successive governments have maintained a high land price policy, which has been a punitive tax on average citizens as the property developers simply pass on the costs to buyers.

Today, Hong Kong has the dubious distinction of being the world's most expensive property market, with the highest wealth gap, with the majority of its residents struggling to make ends meet. This mess is a direct result of poor administration and conflicts of interest of key officials paid enormous salaries and benefits. Meanwhile, the government's coffers are bulging with surplus money and the property developers are laughing all the way to the bank.

Who is ultimately accountable to the Hong Kong public for this mess? My message to John Tsang is, please stop running Hong Kong like a property developer seeking to maximise profits at the expense of the SAR's citizens.

Sanjiv Singh, Mid-Levels...."

The Heritage Foundation's Economic Freedom Index has long been recognised in the territory as flawed due to its failure to understand the high land prices policy of the government is a tax. It also fails to include the fact that nearly 50% of the households live on public subsidised accommodation. Singapore, ranked as the second freest by the same foundation has a much higher percentage of households living on socialised housing.

The article did not "blame" the present Chief Executive for high land prices. As noted by Mr. Singh in his Letter to the Editor, Donald Tsang, the previous Chief Exectuvie, was by deliberately restricting land supply. However, Mr Leung's medicine is worse than the cure.
A new reply to this comment has been posted.
Pingfan Hong Mar 9, 2013

It seems odd for the author to blame the Chief Executive of Hong Kong for the expensive housing prices in the city, which is ranked number one as the freest economy in the world according to the Index of Economic Freedom by the Heritage Foundation.
A new reply to this comment has been posted.

https://prosyn.org/7bXaeut

Hong Kong’s Hollow Leadership

Introductory Offer: Save 30% on PS Digital

New Comment

Contact us

Log in/Register

Hong Kong’s Hollow Leadership

Introductory Offer: Save 30% on PS Digital

Edit Newsletter Preferences

Set up Notification