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Hong Kong Harbor


By Anthony B.L. Cheung
July 2011
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By all accounts, Hong Kong is an affluent city. It has rebounded quickly from the 2008 global financial crisis. Gross domestic product grew by 7% in 2010, with every sign of sustained expansion, with 5%-6% growth rates expected. The unemployment rate for March to May this year stood at only 3.5%, which should be the envy of many developed economies. The government’s coffers are in excellent shape, with financial reserve standing at HK$600 billion (US$77.4 billion). Yet Hong Kong has remained an unhappy city, with almost cross-sector frustrations and a growing social uproar from the younger generation, dubbed the Post-80s (i.e. those born in the 1980s and after). As the economy booms, with foreign and in particular mainland Chinese investment monies pouring in, the city ironically is experiencing one of its most trying moments of the recent decade.

It is not just the government suffering in popularity and credibility. Political parties and legislators have even less public confidence and support. Only the judiciary is spared the public’s bashing. Looking at the domestic debates, one would gain the impression that political institutions are about to fall, yet they remain some of the most vibrant in the region and the world. The rule of law, anti-corruption and a free society remain the hallmarks of the new Hong Kong under China’s sovereignty. According to the World Bank’s global governance indicators, Hong Kong’s scores are higher than the OECD average except in the aspect of “Voice and Accountability”. 

So it is a city filled with contradictions.

From pain of recession to pain of growth

Many can still remember the mass protests by over half a million people on 1 July 2003, which has since become an icon of the opposition movement and a turning point in Hong Kong politics. The first Chief Executive of the Hong Kong Special Administrative Region, Tung Chee Hwa, was subsequently forced to step down in early 2005. Whereas the 2003 uproar was triggered by the government’s attempt to impose national security legislation on Hong Kong under Article 23 of the Basic Law—the Chinese legislation that serves as Hong Kong’s de facto constitution—the social discontent was also caused by economic recession, rising unemployment, negative equity because of the collapse of the property market and the outbreak of SARS (severe acute respiratory syndrome), making Hong Kong a city without life.  

This time, however, the current Chief Executive Donald Tsang is overseeing the pain of sustained growth. Property prices are now skyrocketing, leading to a hate campaign against the so-called “hegemony of property developers” within the community. The wealth effect is increasingly determined by whether one owns a property or has invested in properties, with the have-nots joining the league to accuse the government of “collusion” with property developers. As the property market prospers, wealth distribution becomes further distorted and income disparity widened, not narrowed, feeding into another crisis of social discontent which many easily blame on a non-democratically formed government.

The wealth gap

Hong Kong is still one of the most affluent cities in China and in Asia. However, its status as a global financial centre, after London and New York, and its booming economy on the surface cannot hide some widening disparities. At the livelihood level, a global financial centre actually shoots up living costs and wages at the higher end, but the wealth created through economic growth has failed to trickle down to the lower-income sectors. Indeed, one of the final straws that has persuaded the government to accept the need for statutory minimum wage is the deteriorating wage trend in some “lowest-income sectors” – namely cleansing, security guard service, and restaurant and catering services – where the prevailing wage rates look disgraceful.

Hong Kong’s Gini-coefficient (a United Nations measure of income disparity) had deteriorated from 0.518 in 1996 to 0.533 in 2006. Some may argue that we should not just take the Gini-coefficient at face value, as it measures relative income disparity and does not reflect the actual level of income and wealth. However, statistics on income trends do not look good at all. Despite GDP growth, income levels for many have stayed stagnant. The median domestic household income remained the same in 2009 as in 1999, at HK$17,500 (US$2,250) per month according to official figures. Yet households with less than HK$10,000 (US$1290) per month had jumped in number from 498,600 to 649,900, and those with less than HK$25,000 (US$3.225) from 1,319,500 to 1,511,600 (or two-thirds of the total). While households at the top end earning more than HK$100,000 (US$12,900) monthly also increased from 46,700 to 65,600, the widening gap is very clear.

Hong Kong does not have an official poverty line. According to the Hong Kong Council of Social Service, using half of the median income as the poverty line, the overall poverty rate was 18.1% for the first half of 2010. Poverty was highest among the elderly at 65 years and above, at 33.9%. Even for young people aged 15-24 years, it was 20.1%.

Deteriorating social mobility

Educational attainment has not necessarily improved employment earnings. Statistics show that employees with post-secondary non-degree and degree qualifications earned a median monthly income of HK$13,000 and HK$22,200 (US$1.680 to US$2,860) in 2009 respectively, down from HK$16,000 and HK$23,000 (US$2,060 to US$2,970) in 1999. Different occupations fare differently. Managers and professionals in financial institutions have mostly earned much more over the past decade, but some in other sectors like transport, storage and trading have not. For technical, clerical, service and non-production workers, wages have mostly remained stagnant or even declined, being the victims of a financial centre with a narrow industrial structure. The growing of six new industries – including creative industry, education and medical services – has yet to deliver results.

The proportion of people with better education and the number of administrative and professional positions may have increased, but there is no evidence of a widespread upward mobility in terms of income or quality of life. This largely explains the growing frustrations among the younger middle class who see a less promising and secure future for themselves than their predecessor generation. If the picture for the better educated is deteriorating, one can imagine how further alienated those less educated and school drop-outs would become. It’s all very well to speak of a more competitive world, but for those with educational qualifications and yet unable to benefit from competition, it does not work to inspire confidence. Hence a spark of fire can easily ignite a social blaze, particularly as local politics critical of an unelected government are driving a trend of radicalization in street protests and challenging public authority and order.

Rising costs of living

In the meantime, living costs are rising. As a global financial centre, Hong Kong ranks second in 2009 and fifth in 2010 in the International Cost of Living Index. Living costs are determined by multiple factors including exchange rates and housing prices, both of which are to the city’s disadvantage. The pegging of the Hong Kong dollar to the US currency since the 1980s, initially for economic and political reasons, has now worked against the city’s interests. Some experts consider the Hong Kong dollar substantially undervalued because of the peg, making imports much more expensive than before as the US dollar continues to weaken due to its economy and short-sighted monetary policy.

The Census and Statistics Department’s Consumer Price Index (CPI) saw a significant 5.2% increase in May this year, with CPI(A) - for lower expenditure (hence lower income) households - recording a sharper 5.6% jump. But CPI does not give us the full picture of living costs on the ground, i.e. the housewife’s shopping basket. Our daily necessities are mostly imported, and consumer prices are steadily going up because of the weak Hong Kong dollar and the strong reminbi. Consumer confidence surveys of the region found Hong Kong lagging behind mainland China and even Macao, mainly due to declining confidence in consumer prices, living standards and housing purchases.

While the government has done a lot to increase spending on education and training, and to keep the unemployment rate low, this has not turned into a “feel good” factor in public sentiment. It is mainly because education no longer guarantees upward social mobility, and wages lag behind the rising costs of living and the runaway housing prices. The introduction from 1 May this year of a statutory minimum wage, at HK$28 (US$3.60) per hour, and the Financial Secretary’s relief measures announced in the 2011-12 budget, including a first-time-ever HK$6,000 (US$775) cash handout to all permanent residents aged 18 and above, may provide some alleviation, particularly for the lower income households, but more fundamental ways must be found to tackle the livelihood crisis.

Housing prices getting out of control

After the bitter experience of the 1998-99 Asian financial crisis, when the property market collapsed resulting in various social and economic outbursts, it is well understood why the government would be most reluctant to do anything that might be seen as leading to any severe market adjustment, which might cause financial turbulence and erode local confidence. But runaway property prices are not a welcome sign either. Apart from fuelling social discontent, it also increases the risk of an asset bubble.

Housing affordability directly affects the interests of half of the population who are not protected by public housing (including home ownership scheme units). The mortgage-payment-to-income ratio stood at 48% in the first quarter of 2011, double that of five years ago. Property prices have been increasing at a much faster pace than wages since 2006 and even faster than per capita nominal GDP since late 2009. Wrapping up his official visit to Hong Kong during 12-14 June 2011, Director Wang Guangya of the Hong Kong and Macao Affairs Office of China’s State Council, warned that housing demands not only constituted a social problem, but might turn into a political problem if not properly handled.

The lowest-income households, except those of new migrants with less than seven years’ residence, are already accommodated in cheap public rental housing under the Housing Authority’s pledge of allotting a unit within three years (actual waiting time is now two years). Elderly citizens meeting the means test will get a public rental unit even faster, in one year. The problem has more to do with the growing number of unmarried youngsters, including college graduates, who queue up for public housing because of inability to rent or buy their own homes in the private market. The Housing Authority imposed a quota and points system on these young people several years ago, and their applications now account for over 40% of the general waiting list.

It is time to embark on a new Long-term Housing Strategy which incorporates measures to target both supply and demand side problems. Supply measures should include the development of new lands for residential use, a review of zoning criteria and more regular land sales. Demand-side approaches, apart from anti-speculative measures, should include the revitalization of the public housing sector and the re-launch of the Home Ownership Scheme (terminated by government in 2003 in order to restore confidence in the private property market).

Hong Kong becoming a national market for China

With mainland purchases already accounting for 40% of transactions in newly-built residential units, this is a structural change not seen before. If external buying is driving an unrestrained property wild-horse, then imposing some form of restrictions on non-resident buyers or a capital gains tax on them, as some market economies do, should not be dismissed as undue intervention. Back in 1998, the government heavily intervened in the stock market in order to fight back against international speculators. Some see restrictions as discrimination against our mainland compatriots. But even mainland cities like Beijing and Shanghai impose restrictions on non-resident purchases of housing properties. If Hong Kong’s stability, as China’s global city, is harmed economically and socially by the undue rush of mainland investment and speculative monies into its property market, what good does it do for the national interest?

The influx of mainland property-buyers, and of mainland mothers seeking child delivery in Hong Kong’s hospitals, another new trend, is symptomatic of a changing economic relationship between the mainland and Hong Kong as the two parts get closer in social and economic integration under the “One Country Two Systems” framework, leading to a single market. Hong Kong benefits economically from an enlarged market for its products and services, yet its risks also come precisely from that change. Hong Kong is fast becoming a “national” market for the whole of China, not only in properties, but also in other consumption and investment sectors. It is increasingly a place for visits, education, medical treatment, purchase of consumption goods and investments for many mainlanders, which generates income for the city. However, the purchasing power of even a tiny percentage of the mainland will also be able to shape, overwhelm, or distort the local economy.

Hong Kong policymakers must from now on assess social needs and economic demands not just with reference to the local population, but also to take account of the growing numbers of mainland visitors and migrants, and mainland-origin demands, which are creating pressures on the local housing, transport, healthcare, education and even employment markets. Otherwise, sentiments of local protectionism and resentment against mainlanders will only create new tensions and a political crisis of a different kind.

Need to think out of conventional wisdom

Hong Kong is at a crossroads. It is a city of both growth and disparities. Apart from constitutional reform and democratization, it also has to cope with a fundamental change in its social and economic structure within the new reality of “one country” and a different regional milieu of growth led by mainland China. The question of class has returned, but in a different form. Previously, in the good old days of economic growth during the 1970s-90s, the middle class had prospered and did not need to rely on government support and intervention; hence the British colonial administration in its more enlightened mind could just focus on doing more for the grassroots and underprivileged, through public housing, social security and welfare, thereby reducing class conflicts, while at the same time using education as the vehicle to facilitate social mobility.

Such a cycle of managing the class question is made redundant by the new post-reunification realities. The grassroots have not benefitted from economic growth. Income disparity has got worse. The middle class has become less confident and increasingly alienated, as it turns from a class of optimism into a class of frustration and perceived downward mobility, as depicted by Kenichi Ohmae’s M-shape society. It is now making not fewer demands on the government than the grassroots. Taking Hong Kong out of such gloom requires not only GDP growth to make the cake bigger, or a democratic and accountable political system in order to build public trust, but also a visionary leadership capable of going beyond conventional wisdom to inspire hope and positive thinking through strategic planning and proactive policy interventions.

Anthony B.L. Cheung is President and Chair Professor of Public Administration at the Hong Kong Institute of Education. He is also a non-official member of the Executive Council (cabinet) of the government of the Hong Kong Special Administrative Region. Holder of a PhD from the London School of Economics and Political Science, London University, he is the founding chairman of SynergyNet, a policy think tank, and a founding director of the Hong Kong Policy Research Institute. He has been a member of Hong Kong’s Legislative council and is a former vice chairman of the Democratic Party.

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