Hong Kong's newest "free" paper reports on the world's "freest" economy...where the Government has spent the past year or so buying shares in the Hong Kong stock exchange, ostensibly to protect the exchange from foreign predators and enhance co-operation with mainland exchanges. The government has invested about HK$10 billion of the public's money, only a decade after the last, more massive intervention, in the market.

Cato, please note.

Update: HKEx director David Webb isn't impressed.

"Records smashed" reports The Standard, a newspaper who not co-incidentally largely relies on the level of the Hang Seng for its own financial health. The Hang Seng has managed to go from 19000 back up to 23000 in the space of a week, largely thanks to news that China is to allow the hordes of mainlanders (previously despised, now welcomed with open arms) and their wallets to spend as freely on Hong Kong shares as they do on their own. The only problem is a small one...the Tianjin authorities haven't quite got the paper work sorted out yet. This troubling detail means the Hong Kong market has managed to go up in anticipation of the hordes rather than because of them. And no-one has yet asked an obvious question: why is it that the Bank of China branch in Tianjin is the only one on the mainland that gets to run the "Hong Kong stock direct train" scheme? Do the shareholders of ICBC or Bank of Communications really mind that BoC got this supposed golden goose?

Don't look for any of this to make any sense.

Certain parts of the Hong Kong economy are expecting a boost this week, courtesy of the US military:

Wan Chai rolled out the red carpet yesterday as bar owners eyed a bonanza of up to HK$78 million from the 5,000 visiting sailors aboard the USS Nimitz.
The nuclear-powered supercarrier, one of the largest warships in the world, steamed into Hong Kong yesterday, and ship officers said crew members were expected to each spend between US$800 and US$2,000 (HK$6,240 to HK$15,600) during their four-day stay.

However, the crew has been advised to strictly adhere to the 11pm curfew and the fact that the legal drinking age for American sailors is now 21.

The people in charge of the economy are captains of economics, using science and precision to guide the lives of millions....right? Perhaps not, says our very own Sir Don:

The stock market would have collapsed and banks forced to raise interest rates by 50 percent had the government not stepped in with HK$120 billion in 1998 to force speculators to retreat, said Chief Executive Donald Tsang Yam-kuen...Many foreign speculators had expected us to fight till the Hang Seng Index had climbed to 10,000 points, but we decided to make a sudden halt at 7,800, which was proposed by [Monetary Authority chief executive] Joseph Yam Chi-kwong and Hui, who insisted such a move would give us good luck as the Hong Kong dollar is pegged to the greenback at HK$7.80."...

"We only intended to fight the vultures by going back to step one. Norman Chan, Rafael Hui and I are all superstitious about 7.8 as our lucky number, where our US peg-link stays and our index finally hit rock bottom at 7,800.

Does Hong Kong need some kind of anti-trust/competition law? Let's take a look at yesterday's Government property auction, as reported in The Standard:

Tuesday's auction also saw Manhattan Garments, controlled by Liberal Party chairman James Tien Pei-chun, outbid K Wah International (0173), Chinachem and four unidentified bidders to secure the other lot on Tsing Lung Road in Tuen Mun for HK$960 million - the high end of market estimates of HK$800 million to HK$1 billion. The sale price was 64 percent above the HK$585 million opening bid.

Manhattan Garments general manager Patrick Chow Kwok-choi said the company would be the sole developer and may commit about HK$1.5 billion to develop townhouses. Manhattan chairman James Tien said 60 to 70 townhouses ranging from 2,000 to 3,000 sq ft each will be built on the site. He estimated construction costs at between HK$2,000 and HK$2,500 psf.

The legislator expects the townhouses to sell for about HK$10,000 psf, representing a potential profit margin of more than 40 percent.

So what will it take to force the HK government into enacting a competition law? Perhaps yesterday's land auction. The SCMP reports:

A Sino Land-led consortium won a residential site in West Kowloon for a less-than-expected HK$4 billion yesterday after the government issued an unprecedented warning to developers over their conduct during the bidding.
Last week, the Lands Department sent a letter to the Real Estate Developers Association reminding developers they must "behave properly" during the auction - which was interpreted as a warning against colluding during the bidding process to keep down prices.

At the last major sale, in March, Sino Land acquired a Tai Po site after its chairman, Robert Ng Chee-siong, was seen during the bidding holding discussions with Nan Fung Development. The privately owned Nan Fung then dropped out of the bidding and after the auction the two companies announced they would jointly develop the site.

Sino Land and Nan Fung were the major partners in yesterday's winning consortium, which also comprised K Wah International and Chinese Estates Holdings. They secured the 86,758 sq ft site on the 29th bid of the auction for HK$6,147 per square foot yesterday, about 10 per cent less than analysts estimated.

All Hong Kong residents know that the $1,000 note is the most worthless piece of cash on the planet. It is almost impossible to use the notes at any retail outlets (one notable exception is Canteen, which gladly beraks my $1,000 note for some grub and a wad of smaller, more useable denominations). In the past week there's been a proliferation of fake $1,000 notes, prompting the government to say "don't panic". Jake van der Kamp at the SCMP takes up the story:

...Few people really want these things [$1,000 notes]. For ordinary day-to-day cash transactions, the HK$1,000 banknote is much too big a denomination. It is an invitation to trouble from merchants and has always been so, not just in this latest counterfeit scandal.

But some people obviously do seem to want it. The 2005 figures from the Hong Kong Monetary Authority (the latest available) say that in value terms the HK$1,000 banknote accounts for 53.6 per cent of the total banknote issue. This, by the way, is up from 39.3 per cent in 1997, which says not only that these bills are in high demand but that this demand has grown.

...the number of [$1,000 notes] in circulation rose from fewer than 40 million in 2000 to more than 80 million in 2005. Take note that we are talking here not of the value of these banknotes, but of the number of them - 80 million individual pieces of yellow paper, 13 apiece for every adult member of our population. Who wants them?

...Issuance of HK$1,000 banknotes has thus grown much faster than the overall banknote issue...Why did we need so much more cash in 2005 than in 2000 for every dollar of GDP we generated?

Perhaps it was because people stuffed cash into mattresses for a few years. Deflation during that period meant that the value of those banknotes actually rose and, with deposit rates at near zero, there was no reason to put the money in banks. The HK$1,000 banknote fits the purpose nicely - more money in the mattress with less bulge.

I think there is another explanation, however. The HK$1,000 banknote is the money launderer's banknote of choice in Hong Kong. Shuffling cash is a good way of hiding the proceeds of nefarious doings and, if you are doing nefarious doings in size, it helps to have a big banknote issued in size.

Would you care to comment, you people at the HKMA, about how our note-issuing banks seem so eager to accommodate money launderers? Could we have a police comment on this, too? Whatever the explanation, I think a good counterfeit scare actually has some welcome aspects. It scares mattress money out of mattresses, it makes life more difficult for money launderers, and it reminds the powers that be that shopkeepers have always had good reason to shun a certain nasty form of yellow paper.

The HK government has listened to the people and decided Hong Kong needs a cross-sector competition law. But some people were worried:

Some respondents from the business sector have expressed concern that although the aim of such a law is to maintain a competitive environment, small and medium enterprises may become the target of complaints when the law is in place.

Let's have a contest as to who the first target of the new commission might be. And more importantly, who might not be a target.

Henry Tang's budget has received plenty of good press today. Amongst other gems, the SCMP reports:

Profit-making companies and the highest income-earners who pay the standard tax rate will not benefit from any tax reduction under the principle of "pay as you can afford", Mr Tang said. But the number who pay the top rate is expected to shrink from 35,000 to 5,000 after a revamp of marginal tax bands and rates, taking them back to 2002-03 levels.

He conceded that the now-defunct goods and services tax had upset the people, but was adamant that the narrow tax base was an issue that needed to be addressed.

"The GST is not at the bottom of Victoria Harbour," he said adding that the next government would be given a report after the current consultation closes this month.

So our next chief secretary basks in the glory of "turning around the deficit clouding the government's treasury since he became finance chief in August 2003, when the fiscal deficit was mired in a deficit of about HK$60 billion." He's managed to do this by, ummm, riding a property and economic boom and staying out of things. Tough job but someone's gotta do it.

Yet amongst all the hype, there are some glaring gaps. The budget does very little for the "working class" - those that don't pay any income tax at all (why is there so much talk about class in a supposedly non-Communist economy)? And what about the army of domestic helpers that were forced to take a cut in their minimum wage to help "share the burden" when times were tough a couple of years ago, on top of which they were effectively taxed on their income whereas Hong Kong residents earning the same amount aren't? Can we expect helpers to see a rise in their minimum wage and abolition of the duty on their wages?

Finally, in the middle of today's SCMP there's an advertisement in green, which takes half the page. It's full of hand-written scrawl and arrows to vacuous questions. This is what passes for political advertising in this city. Why does The Don bother and surely with the oodles of money he's raised he could at least find someone who can write more neatly than himself? The Don's website doesn't have the ad that appeared today in the People's South China Morning Post - they'll get the hang of this internet thingy-majiggy soon. The Don should ask Henry Tang for a government hand-out to help with "developing internet infrastructure".

This is the graphic at the government website today, announcing the income tax cuts for the seven people that pay it in this city. Despite weeks of newspaper leaks protesting there would be no tax cuts, Henry Tang has wound the clock back to 2002 in a giant up-yours to Singapore and allowing the Big Lychee's citizenry to enjoy a couple of crumbs of benefit from the property boom that is busy enriching developers at their expense. More importantly, he's also cut the city's punitively high grog tax. One waits with baited breath to see if Lan Kwai Fong's overpriced bars manage to pass on the cuts to their patrons.

Next year, Mr Tang might find a few savings by firing the graphic artists at the HK government website.

An article in the Standard today made amusing reading: the gobsmacked reporter was "shocked, shocked!" [in Casablanca parlance] that no companies on Hong Kong's second board, the Growth Enterprise Market (GEM), won any Corporate Governance Disclosure Awards.

Hong Kong's disclosure requirements from an accounting perspective are some of the weakest in Asia anyway (who needs to know the breakdown of operating profit?), and those of the GEM are even more iffy.

Even funnier was the revelation that these awards have a 'special' category for mainland companies listed in Hong Kong. A sort of 'Special Olympics' of Disclosure Awards, if you like, for the truth-challenged management boards of China's top firms. The top two winners were Jiangsu Expressway and Shenzhen Expressway, companies whose core operations would be, pardon the pun, rather 'straight-forward'...

In one corner we have Milton Friedman, Nobel prize winner and founder of the Chicago school of economics. On the other, National People's Congress member and geography professor Victor Sit Fung-shuen. What could bring these two together? Donald Tsang's replacing of "positive non-interventionism" with "small government, big market". Friedman responded with an editorial in the WSJ titled Hong Kong Wrong where he laments the end of John Coperthwaite's policy of benign neglect and the rise of a more activist government, even though The Don was simply stating what has been happening in practice for years. In response Professor Sit has told Milton he just doesn't understand the Big Lychee:

Instead of Friedman's vision for Hong Kong as a free-market city on a hill, NPC delegate Victor Sit Fung- shuen said Tuesday, its success requires the opposite approach: a dose of Singapore-style government intervention.

"Even though Mr Friedman has won a Nobel Prize in economics, he has never understood Hong Kong," Sit wrote in a combative letter to the local media...
But Sit said Tsang is right to throw away that philosophy, calling a stronger government hand the only way forward for the development of the high-tech, legal, scientific and financial sectors.

Sit, a local delegate to the NPC in Beijing since 1993, as well as a professor at Hong Kong University's School of Geography, argued that Hong Kong needs to lure more rising stars out of the private sector and into the government, and put them to work drafting innovative policies that will sustain Hong Kong's prosperity...When asked who is qualified to prescribe economic philosophies for Hong Kong, Sit said there are many experts available. "There are quite a lot of names - but not Friedman."

"How many bad ideas can you put together in one place?" asked Work, chief executive of The Lion Rock Institute, a local free-market think-tank. "It's really surprising that anyone from Hong Kong would suggest we throw away the legacy of freedom that built us, and mimic the policies that have created one of the most repressed countries in Asia," he said...[but] Sit may have the ear of the chief executive too. He said he had spoken with Tsang "more than once" about a more proactive government approach. "I think he understands me," Sit said.

Should Professor Sit seriously think Singapore is worth emulating, it would be worth him spending 10 minutes reading the famous Why Singapore is a Pathetic Place by Hemlock, which could now add the FEER banning and repression of dissent during the recent World Bank/IMF meeting. Mind you, that website is probably illegal in Singapore. Pathetic.

The SCMP was busy on the weekend telling the world how Hong Kong was the safest city in the world, based on some UN report that clearly takes into account the influence of having the best organised crime organisations in the world. But curiously today they bury an interesting bit in the News Briefs section:

Seventy-six per cent of Hong Kong firms said they had lost business in the past five years because a competitor had paid a bribe - making the city the worst-affected place for bribery of seven places in a survey of senior businesspeople. The International Attitudes to Corruption Report, conducted by consultancy Control Risks and law firm Simmons and Simmons, was released yesterday.

There's been much ado about nothing in the past week in Hong Kong over Donald Tsang's suggestion that "positive non-interventionism" is no longer the guiding force for the government's economic policy. While refreshing to hear the government has an economic policy, the term "positive non-interventionism" is one of those terms only a civil servant could have invented and one only the chattering classes could get worked up about. Today the Don has issued his response to the confusion via his usual outlets: the Hong Kong newspapers. Our fair city's equivalents of Pravda and People's Daily dutifully reprint the Don explaining the policy is now the far less obtuse "big market, small government". This from the government that rigs the property market, makes a habit of white elephants (Cyberport, Disneyland, West Kowloon....hey, what ever happened to West Kowloon anyway?) and protects cartels at the expense of the population. There's plenty of variations on the theme:

Different financial secretaries have used different labels for their economic principles.

When I was financial secretary, I emphasized "maximum support, minimum intervention and fiscal prudence." Antony Leung Kam-chung saw the government's role as "a proactive market enabler." Our current Financial Secretary Henry Tang Ying-yen upholds the principle of "market leads, government facilitates."

But admist all the fuss, I have a couple of questions. Op-ed pieces get paid between HK$1-2 per word. Does the Don get a cheque from the newspapers every time he allows them to publish his 885 words of wisdom? If so, where does that money go? Or is this what "big market, small government" really means?

Mini-mogul David Tang opened a cigar shop in a Macau casino, and neatly divined one of Hong Kong's major problems in the process, according to the SCMP:

"You can't have a vibrant and competitive economy without intense competition," he said. "Stanley Ho's a very good friend of mine ... but he's so rich he doesn't need to work for 10 more lives. Nobody needs to shed a tear for Mr Ho.

"We read about Hong Kong being the freest economy in the world but when was the last time a foreigner actually invested money in Hong Kong? Why? Because Hong Kong is controlled by five people."

City's biggest bank to flog its staff quarters on the Peak thanks to sky high valuations. But won't someone think of those poor bankers, left on the street? But I know someone who can help:In April, Hutchison Whampoa managing director Canning Fok Kin-ning bought a detached house at 37 Deep Water Bay Road for HK$350 million.

He must have some spare space in there somewhere.

Meanwhile, in the Twilight Zone, Regina Ip becomes a democrat. I've heard of a road to Damascus conversion, but never a road to Stanford...

Hong Kong Government sets record for longest time to complete corporate merger: 50 years. Lest anyone ever thought otherwise, the KCRC/MTR rail merger is about one thing and one thing only: property.

The Don dropped in on his new friends at the DAB yesterday to explain why it's far better to spend HK$5 billion building a new government headquarters at Tamar rather than at daggy old Kai Tak. Rejecting arguements that it would increase traffic, clutter the harbourfront, that it is unnecessary and that putting it at Kai Tak could be both cheaper and a boon to that area, the Don explained that it is vital for the government's branches to all be within 5 minutes of each other. Why this is the case isn't made clear. I thought it was meant to be about the seperation of the three branches, not the proximity?

Meanwhile, it turns out the taxman had a good year in 2005. A single income taxpayer had a bill of HK$101 million, implying an income of HK$630 million or so. The top ten taxpayers ranged from HK$13 million up to this figure. Nice work if you can get it. Given the tycoons are the most likely to benefit from the juicy construction contracts for Tamar, why not earmark their income tax to pay for it?

Jake van der Kamp takes the bait in a nicely set up April fools joke involving the newly formed Civic Party. I especially like the "targets for investigation of antitrust behaviour".

It's time to send Marxist economist Liu Guoguang a copy of Hayek's Road to Serfdom, according to the SCMP:

Market-oriented reforms must not override state planning because it is a remedy for market failures, including the widening wealth gap, a leading mainland economist said.

The latest shot from Liu Guoguang , an adviser to the Chinese Academy of Social Sciences, shows that intense debate over the direction and thrust of the mainland's economic reforms is continuing. Mr Liu's comments, carried in the China Youth Daily yesterday under the headline "Socialist market economy also needs planning", came after Premier Wen Jiabao pledged to push ahead with reforms earlier this month at the National People's Congress' annual conference.

Mr Liu said pro-reform economists had "blind faith in the market". "An erroneous perception is widely spreading at the moment, and that is to use the word `planning' in a totally derogatory sense," he said in the newspaper's review of China's past 50 years of economic development. "Excessive marketisation which excludes the use of planning is abnormal and wrong."

Mr Liu said his emphasis on the role of planning did not advocate returning to a planned economy. Rather, "effective government regulation and intervention is necessary to correct market defects".

He listed five issues which the market alone was unable to address: the overall balancing of demand and supply, economic restructuring, fair competition, environmental protection and social equity. "The market, which is conducive to the promotion of efficiency and development, cannot realise real social equity and will inevitably result in polarity between the rich and poor," he said.

"The government should take some measures to prevent those problems from worsening. It is more necessary for the government to play a complementary role to remedy market defects."

At his post-NPC press conference, Mr Wen vowed to press ahead with reforms despite "difficulties as we move ahead" and warned that "a retreat offered no way out". Many analysts believe Mr Wen's strong support for reforms may help turn the tide and help the pro-reform camp to prevail over conservatives arguing that reforms have gone too far.

Most worryingly, there's plenty of people that will agree with Mr Liu, and not just in China.

Seeing we're on things planning, Jake van der Kamp notes that Hong Kong's been paying consultants for several years to come up with a master plan, but they've not been able to finish the task. Full article below the jump, but here's the money graph:

These big visions never work. Events always overtake them and, if we shackle ourselves to them, we only make ourselves less responsive to events. Just imagine what a Vision 2006 would have been 30 years ago. It would have forecast a much poorer but more populous Hong Kong surviving on a garment industry with the industrial emergence of China ignored. Long-term studies do not look forward. They just take the present and project it forward and we wind up spending public money on the wrong things for a few years until we recognise reality and give up.

Planners' vision for the future no clearer after five years of babble - Jake van der Kamp

Among my few scholastic achievements include learning to speak Consultababble. I learned it when I was a cub reporter in Vancouver many years ago and assigned to cover the municipal council of the district of North Vancouver.

The big story in this municipal council at the time was the decision to formulate a master plan for the entire district. There was to be no more haphazard planning of development. All would be decided years in advance.

I was as keen as mustard. North Vancouver was leading the way in sound urban planning and I would be there to make sure it got full play in the Vancouver Sun.

I believe I actually managed to plough my way through about three series of the resulting consultants' reports, two more than anyone on the council read and then, fortunately, the whole thing petered out. Net result: I learned to speak Consultababble while North Vancouver paid a big consultants' bill, was told more studies were needed, and went back to haphazard planning, the best sort.

Thus, you will understand that I am not entirely surprised to see Hong Kong's own big vision for the future, Strategy 2030, seemingly adrift and moving nowhere five years after being trumpeted as the answer to where we will be in 30 years' time.

The table shows you where we should have been. This outline schedule, adopted in February 2001, called for all three stages of the study to be completed in 20 months. That means that the final public consultation on Formulation of Development Strategies and Response Plans should have been completed in February 2002.

Hello, fellows, knock, knock, where are we? Do we have that master plan yet?

At least I can say for North Vancouver that it recognised things were going nowhere and let the idea drop. But, as I understand it, we are still formally committed to Strategy 2030 and no one has yet recognised what a charade it has become.

The babbling stream of Consultababble has slowed to a trickle, however. Click the tab marked "What's New" on the official website and three entries come up.

In May 2004, there was a press release on Hong Kong residents' experience of and aspirations for taking up residence in China. In December 2004, there was another press release on Hong Kong people working and living in the Pearl River Delta and then 10 months ago we had a working paper on additional cross-boundary links to the eastern part of Guangdong.

Long-sighted vision, indeed, vision across the border and nowhere short of it. Was this not meant to be a study on what we would be on this side of the border in 2030?

But, then again, what are we to do with the visions of our past chief executive, Tung Chee-hwa?

He told his planners he wanted not only a major Chinese city but the most cosmopolitan one in Asia with a status comparable to New York and London.

From what I can see, they complied by forecasting population growth well above what we have actually had and, if this had any effect, it was to commit us to far more infrastructure spending than we will need for years to come.

Fortunately, we have taken a somewhat wiser course with the Commission on Strategic Development, which is also supposed to think grand thoughts about the future for us. We have appointed all the great and good of Hong Kong to it and they will talk up a storm until they get tired of it, which should not take very long.

These big visions never work. Events always overtake them and, if we shackle ourselves to them, we only make ourselves less responsive to events. Just imagine what a Vision 2006 would have been 30 years ago. It would have forecast a much poorer but more populous Hong Kong surviving on a garment industry with the industrial emergence of China ignored.

Long-term studies do not look forward. They just take the present and project it forward and we wind up spending public money on the wrong things for a few years until we recognise reality and give up.

I think it is about time that we recognise reality with Strategy 2030 too, but, if our planners will not, let us hear from them where we stand and what we are doing.

Peter Gordon rants why a GST will bring doom and gloom to Hong Kong. Having lived in Australia when that country went through the introduction of a GST, these points are nothing new. Yet ask an Aussie now and you'll generally hear that the GST is one of the least bad taxes. Sure the form filling is painful for businesses (the tax office effectively outsources collection to busniess) but the lucky country has seen steady economic growth, record number of tourists and the sky didn't fall in. I've yet to see a Sydney beggar with a sign, "On the street thanks to GST". But maybe there's another reason. The (sub req'd) SMH reports that Australia's tax men and women are having a hard time of it:

THE Australian Taxation Office has no way of knowing if it's penetrating the underground economy because it will not estimate the extent of the problem, says the Auditor-General. However, tax officials are flushing out cash operators where they can find them, including the "dancing sector of the adult industry".

The Australian National Audit Office has revealed in its cash economy report that tax investigators contacted more than 50 pole dancing clubs "with a sample receiving unannounced visits". The Tax Office says Australia is home to about 2000 dancers at any one time.

Hemlock's genius is in his ability to concisely summarise complicated issues with just the right amount of snark. Today's example is a perfect summary of the need for a sales tax in Hong Kong, Nepal, the problems of functional constituencies and the city's economic structure....all in 3 paragraphs:

IMF asks Nepal to restore peace. In a similarly utopian vein, the experts on the global economy urge Hong Kong to implement a goods and services tax. Since we have a Government that can't even push through a long-overdue few dollars' hike in cross-harbour tunnel tolls or hospital outpatients' fees, this is asking rather a lot. Our visionary leaders can't do anything that's in the interests of the community, because we're not a community. We are "various sectors" Can we ban smoking in restaurants? No, because the Catering Functional Constituency (3,900 votes cast at last election) doesn't want it. Can we increase punishments for minibus drivers who run red lights and kill people? No, because the Transport Functional Constituency (seat uncontested at last election) doesn't like it. The bigger the potential public good, the more self-serving interest groups emerge to wield their vetoes. Citizens and consumers might want better schools, cleaner air and decent homes, but providers of goods and services, and their official protectors, come first.

A sales levy that replaced other sources of revenue would benefit the thrifty, the productive and the wealth creators, such as the 17 of us who pay salaries tax. It would hit some of the lower orders; the sort of people on modest pay who will stand in a line for hours on their day off for a free baseball cap. But with their subsidized education, housing and health care, it wouldn't hurt them to contribute a bit. The pain could be considered a form of civic education. A sales tax would also be opposed by the usual tourism and retail industry vermin, who would argue that the sort of idiots who pay $5,000 for a handbag will flee our shores if we slap a few percent onto the price tag. If only life were so good.

The real potential losers, however, would be the big boys. In theory, a broad consumption levy could replace much of the revenue currently raised from sales of land and property development rights. This is the Government's slice of the wealth that is sucked relentlessly from the rest of the economy by the property cartel in the form of inflated house prices and rents, which of course cause the severe, job-destroying economic distortions and poor quality of life many Hongkongers call normal. Add to this the huge power that ownership and tight rationing of land gives to unelected officials and then consider that a universal sales tax would be the ultimate argument for universal suffrage and spreading tranquility the length and breadth of the Himalayas starts to look like a cinch.

Hong Kong is declared again the world's freest economy by the Heritgae Foundation, a group that clearly has never been here. Jake van der Kamp says it best:

Coming right down to it, Somalia is the world's freest economy

According to the Hong Kong Census and Statistics Bureau, the government consumed 9.9 per cent of GDP in 2004, down from the 10.53 per cent reported in the 2005 Index. As a result, Hong Kong's government intervention score is 0.5 point better this year. In the April 2004-March 2005 fiscal year, according to the Economic and Trade Office, Hong Kong received 1.7 per cent of its total revenues from state-owned enterprises and government ownership of property.

And there you have it from the Bible. The Heritage Foundation of the United States is the accepted authority in these matters and it has once again rated Hong Kong as the freest economy in the world with a ranking of 1.28, our best score ever. I am not about to say that Heritage Foundation has it all wrong. Hong Kong deservedly rates well up this index. But by employing a standard cookie-cutter template for its ratings, the foundation has missed a few critical things and they particularly show up in the paragraph I quoted.

Let us deal with a technical one first. Yes, it is true that our government consumed only 9.9 per cent of gross domestic product in 2004, but only if by consumed we mean only what our GDP accounts define as government consumption expenditure. If we include capital expenditure, our government consumed 13.7 per cent of GDP. Oh well, consumed or consumption, it is all just a trivial matter of definition, you know.

And then we get the bit about how our government received only 1.7 per cent of its total revenues from state-owned enterprises and government ownership of property. I now ask you to bear in mind that half of Hong Kong's housing stock is public housing. Bear in mind also the investments and activities of such government entities as Chek Lap Kok airport, Kowloon-Canton Railway Corp, MTR Corp, Cyberport, Science Park, the industrial estates and the list goes on. You probably have the impression from the Heritage Foundation's phrasing that all of these together have a weighting of only 1.7 per cent in our government's budget.

It is possibly true if you do it the foundation's way, which is to say that you include only the money they may remit to government every year after paying all their expenses. This also assumes that they choose to remit it to government rather than keep it in their own accounts. But let us say these are really all government operations and that we should treat their expenditures as government expenditure. It is my guess in this case that you could take the 1.7 per cent in their contribution and at least move the decimal position one digit to the right when assessing how much our government spends.

Look at it another way. The United States builds very little public housing and the money to help the needy cover their housing costs comes out of its direct budgets. This all counts against the US in the score the foundation gives it on government intervention. We in Hong Kong, however, hide it by massive public housing subsidies through a government corporation funded from land grants and land sales. The foundation excludes this from its government intervention score. Would we still rate the world's No1 if it were included? That fact is that we have our advantage largely because all land in Hong Kong is on leasehold, a system of land tenure that the US scorns as an invasion of property rights. The US has gone the freehold route. Our way allows us to hide big slices of government revenue and expenditure. Most other countries cannot do it.

One other country that can do it, however, is Singapore, which has 85 per cent of its population in public housing. And yes, you guessed it, the foundation's choice for the world's No2 is Singapore, the economy that has come closer than all others in the world to achieving communism in the classic Marxist sense.

I shall give you my choice for the world's No1. It is Somalia, which has no government at all and where a very free village-based economy is emerging. It is doing so with no foreign aid, for which Somalia may be grateful. Going by a benchmark measure that staging a one-hour African gun battle costs about US$100,000, and taking into account that Somalia no longer has any foreign money to divert to this pastime, it is also a more peaceful country than it might otherwise be. But Somalia certainly does not fit the foundation's cookie-cutter approach to rating economic freedom and it was not even included in the index.

We have our rating, largely thanks to the approach the foundation has taken, which, whether deliberately or not, happens to emphasise foreign trade and foreign investment over domestic economic considerations. We fit that cookie cutter perfectly.

And this suggests one last question for the foundation. How much of your funding, sirs, comes from Hong Kong donors?

A report today that some Hong Kong gourmets paid US$111,000 for a huge white truffle, that they then donated to charity. One can always see tell-tale signs of excess in any market, and it's usually the 'gourmets', 'gentlemen', and other dilettantes of this world that exhibit them. Pride before the fall...

You decide. Which would you rather stroll down and around to do your shopping? Well, reality-check time: Causeway Bay's retail space is more expensive than the Champs Elysees or anywhere in Paris for that matter (the Champs-Elysees is not my favorite shopping area in the French Capital, but I'd certainly take it to the unregulated chaos of CWB).

I suppose in Hong Kong, which, when you take out all designated park land, is the most densely packed place on earth, space comes at a premium. But what a premium! The linked article in the International Herald Tribune leads with an old story, of how Dublin Jack's on Cochrane Street was forced to close when its rents were doubled from HK$140,000 a month to HK$280,000 a month. I also found out that the retail space on the ground floor of Chungking Mansions on Nathan Road is going for HK$350,000! That's a lot of cash per cockcroach. No wonder only those triad-run electronics shops of the bait & switch technique do well there.

The greed of retail space owners has no bounds in Hong Kong. They also have no long-term vision. It is truly terrifying what effect they have on neighborhoods. An example - the Ho Man Tin area I grew up in used to have many restaurants and charming shops on Waterloo Road. Then retailers jacked up prices just before the Crisis in 1997, so only real-estate agencies peddling their sorry retail spaces could afford it. Then after the crisis, the property agencies went bust too. For awhile there were few shops on my road, ecept for the 'bare concrete walls' variety where they sell everything for HK$10. The nice restaurants never came back - they had to move on from a business with such fluctuations in cost.

What will this mean? It'll mean that restaurants in Hong Kong will go back to being mediocre, cost-driven enterprises with no sense of customer service. I understand the retailers feel like it's finally their time after 8 long years, but doubling rents, really - a litle moderation please!

From David Webb:

China Construction Bank, known by local jokers as "China Corruption Bank" in honour of its jailed former Chairman Wang Xuebing (who's offences were actually committed at Bank of China), is heading for listing. If they get this one away, then we shall know that the market has truly reached a top. We haven't seen such excitement since the property and red chip market peaked simultaneously in 1997.

Sure, they've taken the bad loans out of the bank, but what about the bad lenders? Do you really believe that thousands of semi-autonomous branches have suddenly discovered the art of credit analysis and that the local communist party cadres and bribe-waving wannabe tycoons will leave them alone to make good lending decisions? The unseemly scramble of foreign banks to become minority shareholders in the mainland "big-four" is puzzling given that the foreigners have been promised full market access from 2007 under China's WTO commitments. As any investor in HK will tell you, being a minority shareholder doesn't buy you much say in how a firm is run.

Our allegation of Apr-04 against CNOOC Ltd has been proven right. The Listing Committee of the Stock Exchange today issued a public censure of CNOOC for failing to seek shareholders' approval before lending money to its parent's finance company. We look back at the case, and call on the Exchange and SFC to increase transparency over their secret, closed-door disciplinary proceedings.

Updated 17:14

After months of silence, Mr. Webb lets loose two missives in as many days. Today he looks at intervention in Hong Kong's labour market:

We examine HK legislators' calls for a statutory minimum wage and maximum working hours, and the Government's move to put public bodies on this path resulting from a pact between Donald Tsang and the unions during his nomination campaign. He was making promises with your money. We also look at the proposed "1+1" labour importation scheme - a sop to politically-connected textile families, the job-for-life labour contracts of the civil service, statutory Severance and Long Service Payments, and the Protection of Wages on Insolvency Fund.

The Hong Kong Monetary Authority's Joseph Yam today's receives a prestigious award: I am declaring his Viewpoint series is the world's first central bank blog (it just needs some RSS feeds). This week's edition is on financial stability and the property bubble, a self-congratulatory romp on how Hong Kong "survived" the bursting of its property bubble from 1998-2003. Mr. Yam puts it down to six factors:

1. Low interest rates - he concedes Hong Kong was "lucky" interest rates were falling during the period. For that he can thank Alan Greenspan.
2. 70% loan-to-value ratio - thanks to the HKMA's oversight, banks had low-ish LVRs, slowing the decline in negative equity loans. But when prices fall by 60%, that's not going to help you. And in the current market you have to be a chump not to be able to get LVRs of 90%+, even via vendor financing.
3. Two-income households - thanks to Hong Kong's army of domestic helpers, both partners in a family can work, which cuts the odds of unemployment hurting a family because at least one still has a job. Of course two people usually have to work because the city is so expensive, especially property, and those two people endured 6 years of stagnant wages offset by deflation. So thank your helper today. She saved Hong Kong.
4. High savings rate - people are thrifty, so they can afford more debt. It's a crazy world.
5. Highly capitalised banks - you say conservatively run, I say lazy balance sheet. While people scraped together their last few cents to repay their mortgages, banks didn't need to draw down on their capital reserves. It simply proves the adage that people would rather go hungry than default on their home loan.
6. The Hong Kong Mortgage Corporation - the USA has been actively discussing their versions of the HKMC (Fannie Mae and Freddie Mac are the two biggest), with their implicit government guarantees meaning the US taxpayer effectively subsides mortgage rates for home owners at the expense of non-home owners. Mr. Yam says: we established the Hong Kong Mortgage Corporation to which banks could sell their mortgages if they wished to reduce their exposure to the residential housing market to a comfortable level. This implies the HKMC is simply the mortgage dustbin for Hong Kong banks. If the market wanted a way to dispose of mortgages through securitisation, it would have created it.

But Mr. Yam finishes with a prescient warning:

falling housing prices have a debilitating effect on consumption. The feeling of your property going deeper and deeper into negative equity is painful, particularly when your home is your only asset. Those who have been financing consumption by borrowing against rising housing prices are particularly vulnerable. Thankfully the community of Hong Kong is quite conservative in this respect.