Last week I indicated my confidence that, with the removal of all the “demand-side management” transactions taxes in our property market, the Hong Kong economy should perform better than the 2.5-to-3.5-percent growth range that the financial secretary forecast. The performance of the housing market immediately after the announcement of the cancellation of those taxes in the 2024-25 Budget confirmed my optimism.
As expected, transactions jumped. There was a surge in both user and investor interests. One investor bought six units in the 15 Western Street project. Henderson Land’s project Belgravia Place drew an additional 1,020 buyers within just two days. The project was already oversubscribed some 15 times two days ahead of closing time.
I had objected to the Special Stamp Duty and other related demand-side management stamp duties all along, with the exception of the Buyer’s Stamp Duty, which I argued was fine if it applied only to absentee landlords buying from overseas. My stand is grounded on my understanding of economics. Transaction taxes are always an obstacle to the effective functioning of the market. Given the importance of the real estate sector, the damage was particularly large.
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Housing is unique in that each transaction is a big amount and is likely to be the biggest investment of a household for a long time. It typically requires financing, and the local value-added content of a home typically represents a big fraction of the price. I have argued that the housing market provides an important transmission mechanism between the “basic sector” (external trade, both goods and services) and the “non-basic sector” (domestic or internal sector). Hong Kong has a sizeable population and we live in a small area. We need to export so we can feed, clothe and service 7.5 million residents. The “basic sector” earns money from the outside, including exports, inbound tourism, and financial services for foreigners. The “non-basic sector” provides services for those who live here. Because real estate investments are big, if many people buy overseas properties instead of local properties, a large chunk of the money made in the external sector leaves, and the local sector would suffer. Only when the money earned from the outside circulates in the domestic economy will the rest of society, including those who work in the Hong Kong Special Administrative Region government, in the education sector, entertainment and recreation, social services, health services and so on, be able to keep their jobs and thrive.
I had objected to the Special Stamp Duty and other related demand-side management stamp duties all along ... My stand is grounded on my understanding of economics. Transaction taxes are always an obstacle to the effective functioning of the market. Given the importance of the real estate sector, the damage was particularly large.
It is best that the government allows the real estate market to operate without much intervention, as long as town-planning needs and safety concerns are met. Under Hong Kong law, trading profits are taxable. Short-term profits from speculation can therefore be taxed. While we do not have a capital gains tax, the Inland Revenue Department can go after speculative gains that are deemed to be trading profits. Paul Chan Mo-po, the financial secretary, should spell out more clearly the circumstances that would make short-term profits taxable. This would be far better than warning that the government would act decisively if the market misbehaved.
The government is right in stressing the importance of tourism to Hong Kong. It is great news that the central government has approved the inclusion of Xi’an and Qingdao in the Individual Visit Scheme. The idea of monthly fireworks and drone displays over our attractive Victoria Harbour is an ideal step in the right direction. However, I would propose that we repackage the fireworks and drone displays into a monthly drone display based on the results from a competition for thematic ideas that is open to all residents in the Guangdong-Hong Kong-Macao Greater Bay Area. Ten submissions for themes will be open for the public to vote. The top five will be selected, and the drone display will be designed using the themes that win the competition. The competition will arouse creative ideas and interest to visit Hong Kong. The proposed budget of HK$1.09 billion ($139.2 million) will be revised accordingly. By reserving fireworks for special days like the New Year, the Lunar New Year and the anniversary of the HKSAR, the unique importance of these days will be underscored. By removing the fireworks component in the monthly activity we can also raise consciousness about protecting the environment.
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In my view, Hong Kong’s stock market is presently grossly undervalued. Many stocks that have a healthy outlook and which offer an attractive dividend yield have a price-to-earnings ratio that is very low by international standards. If we have confidence in the future of our economy, there is no reason why we cannot put a part of our fiscal reserves in our own stock market. In 1998, we spent HK$120 billion to buy stocks when we fought the international hedge funds that shorted our Hang Seng Index Futures. We made a pile of money in that venture. The Tracker Fund, which is still trading in the Hong Kong stock market, is testimony to that success. We can do the same. The Singapore government has a huge stake in its stock market for the same reason. It has confidence in the Singapore economy. The HKSAR government’s investment in selected stocks will prove to be a wise move. It will boost investor confidence, help close our fiscal deficit sooner, and ensure that Hong Kong will continue its growth trajectory.
The author is director of Pan Sutong Shanghai-Hong Kong Economic Policy Research Institute, Lingnan University.
The views do not necessarily reflect those of China Daily.
