Many people are worried about Hong Kong’s economy. But I am positive that Hong Kong can restore the dynamism of the economy, if the special administrative region government would restore people’s incentives to improve their economic well-being based on their efforts.
Most people are aware that the dynamism of an economy comes from its people. They are right. However, this dynamism can be realized only under some key circumstances. Hong Kong used to be very dynamic and very resilient. Sadly, we have lost much of this and badly need to reignite it.
Hong Kong’s dynamism and resilience were apparent prior to the city’s handover in 1997. Hong Kong’s economic dynamism has been losing steam because after the handover, Hong Kong’s policymakers were overly ambitious and wanted to do great things in a short period of time. Today, since the headwinds are strong and they are mostly externally imposed, we need humility and honest reflections even more. Given the strong will to reignite the economy, I have no doubt we can overcome them.
The dynamism of an economy or lack of it is inherent in people’s natural instincts to respond to opportunities. There are two kinds of opportunities: opportunities that arise in the market, and opportunities that arise through the government’s benevolent behavior. If the government offers opportunities that the market cannot match, people will flock to get favors from the government. This is called “rent seeking” in economics.
Prior to 1997, Hong Kong’s economic dynamism and resilience were apparent. From 1962 to 1997, not a single year had negative growth, notwithstanding the oil crises in the 1970s, the banking crises in the 1980s, and the political uncertainty over Hong Kong’s political future in the 1980s. Since China resumed the exercise of sovereignty, unfortunately, an overambitious program — namely, the Tenants Purchase Scheme (TPS) — to raise the homeownership rate from below 50 percent to 70 percent in 10 years greatly aggravated the blow from the Asian financial crisis. As a result, we suffered the first-ever and deep decline of the economy in 1998. That year, our growth was negative 5.9 percent, much worse than Singapore’s negative 2.2 percent. The following year, Singapore rebounded by 5.7 percent; Hong Kong’s rebound was a mere 2.5 percent, notwithstanding the fact that it was at the epicenter of the Asian financial crisis. In comparison, Hong Kong’s rebound at 16.2 percent in 1976 was much higher than Singapore’s 7.4 percent in 1976 after the 1975 “bloodbath” of the over 90 percent decline in the Hang Seng Index in the wake of the oil crisis. In 1986, Hong Kong’s rebound was 11.1 percent, also much higher than Singapore’s 1.3 percent, after almost zero growth in 1985 for both economies. All this testifies to Hong Kong economy’s “legendary resilience” and dynamism at the time.
Hong Kong can bring back its dynamism if it closes the rent-seeking opportunities that now appear to dominate the market opportunities. Hong Kong still has good entrepreneurs, but they need dynamic executives, professionals, and co-workers
Tung Chee-hwa, the first chief executive of the SAR, introduced the TPS (offering sitting tenants in public rental housing the chance to buy their flats at 12 percent of the estimated market value. But such low prices shocked the market. Even Home Ownership Scheme (HOS) flats failed to sell. Many buyers walked away, forfeiting their down payments. Home prices plummeted. Housing prices continued to fall through mid-2003, for a total of almost six years. While many private homebuyers became negative equity owners and some even had their homes foreclosed by their lenders, many TPS owners were able to sell their homes at a profit. The housing market recovered only after the then-secretary for housing, Michael Suen Ming-yeung, announced in November 2002 that the TPS would end after the sixth-phase sales ended.
The HOS Secondary Market was introduced in 1997 to allow Public Rental Housing tenants to buy secondhand HOS flats without paying the land premium, and it was later formally extended to White Form applicants in 2018 after an interim test run. The HOS Secondary Market Scheme had good intentions and did effectively increase the turnover of HOS flats. But it also greatly increased the investment value of HOS flats and the attraction of buying an HOS flat. However, in order to qualify for an HOS purchase, one has either to meet income and asset requirements, or be a public-housing tenant in the first place, and to apply for Public Rental Housing, one has to meet more-stringent income and asset requirements. Thus, one has to “stay low” in order to get the benefits. Legislator Wendy Hong Wen has lamented the recent prevalence among Hong Kong residents of “lying flat” to remain eligible for public housing benefits. I agree with her judgment.
Another factor that saps Hong Kong’s economic dynamism of course is the Special Stamp Duty. Both Legislator Louis Loong Hon-biu and Executive Council Member Jeffrey Lam Kin-fung criticized the SAR government for hanging onto the SSD for no good reason. Readers may refer to my earlier criticism on the SSD in this column.
Hong Kong can bring back its dynamism if it closes the rent-seeking opportunities that now appear to dominate the market opportunities. Hong Kong still has good entrepreneurs, but they need dynamic executives, professionals, and co-workers.
My recommendation to the SAR government is to offer all Hong Kong permanent residents the opportunity to buy Singapore-style for-sale homes. However, these are humble starter homes with an area of more than 37.2 square meters and they are built in relatively cheap land. Those who want better will need to buy a better home at the market price. It is this motivation that provides the dynamism of a city.
Hong Kong needs to be fiscally sustainable. This means that we cannot afford to have a housing policy that is both directly costly and which also saps our economic dynamism.
I summarize my proposals as follows:
First, in the future, we should not build public rental housing and subsidized for-sale homes on prime land with great views and superior transportation. Public hygiene, safety, and good access of course are all necessary and should be key characteristics of all public housing, including the new HOS developments. This will allow the SAR government to increase its land sale revenue, and will also motivate Hong Kong residents to leave their subsidized flats and buy better homes in the private market.
Second, we need to develop basic HOS flats that are sufficiently comfortable to raise a family and that all Hong Kong residents are entitled to buy, with the conditions that they must actually live in these flats and must not own any other Hong Kong properties. They will be priced at an average price of eight times the median yearly income of economically active households. These flats can be resold at any time, but there is little worry that they will yield sizeable profit since all Hong Kong people can buy from the government at an affordable price.
Third, we need to abolish the Special Stamp Duty, which has caused great distortions in the housing market. This will greatly incentivize trade-up activities and increase housing market turnover. Market turnover will mean better housing conditions for many families and more business in many service industries.
The author is the director of Pan Sutong Shanghai-Hong Kong Economic Policy Research Institute, Lingnan University.
The views do not necessarily reflect those of China Daily.
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