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 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.
Rising property prices are making middle-class flat owners multimillionaires, while their children – even with a good university degree – can hardly afford private housing without parental help. Leung has advocated that young people leave Hong Kong to work in less expensive countries.
Leung came into his job with a self-destructive attitude. Like his mentor, Tung Chee-hwa, Hong Kong’s first chief executive after its return to China, Leung harbors a deep antipathy toward the British and the professional civil service, a legacy of colonialism. He adheres to the Maoist idea that a country consists of “the people” and “enemies” (never mind that he was the youngest and first Chinese partner in a British property-surveyor firm in Hong Kong, and that Tung studied nautical engineering in the United Kingdom).
But treating the civil service as a potential enemy was clearly stupid, as only the civil servants know how the government actually works. Neither Tung nor Leung had any operational government experience, which was most clearly demonstrated in their indifferent attitude toward public appointments. The anti-corruption police arrested Mak Chai-kwong, Leung’s first Secretary of Development, only 12 days after he was appointed. His successor, Paul Chan Mo-po, was soon exposed as a one-time owner of slum housing.
The information that undermined both officials had been buried deep in official documents, and could have surfaced only because someone, or some group, in the civil service with access decided that it would be best to leak it. In Tung’s administration, two cabinet secretaries also had to quit following damaging disclosures. With a couple of notable exceptions, the mediocrity of most of Leung’s appointees elicited sighs even from his political allies.
The same incompetence is at the root of his failure to deflate the property bubble. While he has announced grandiose plans to increase the future supply of land for development, and has hiked the stamp duty twice, the market has figured out that he does not understand that he needs to manage expectations by removing obstacles in the current development pipeline. His measures have increased prices while shrinking the number of transactions – precisely the opposite of what is needed.
One major roadblock that Leung fails to appreciate is caused by an obscure 1981 UK Privy Council ruling, Hang Wah Chong Investment Co. Ltd v. Attorney General of Hong Kong, which gave the government unlimited authority to behave as a revenue-maximizing private monopolist. Thus empowered, the civil service has been behaving without regard to the public interest, as delays shrink supply while boosting prices. A substantial amount of floor space would have been available already if government authority were exercised responsibly.
Yet the same law could allow the Chief Executive to instruct the civil service to act to minimize social damage. Maximizing public revenue is not always consistent with the goal of social and economic stability. After all, Hong Kong is facing a clear and present danger that the property bubble will end in tears for many.
Dissatisfaction with this state of affairs is not confined to the powerless. Victor Li Tzar-kuoi, the son of Hong Kong’s most powerful property baron, Li Ka-shing, astonished the public recently, saying in court testimony that it was a “painful experience” to deal with the government’s imperious Urban Renewal Authority.
Another roadblock is the Hong Kong dollar’s exchange-rate peg to the US dollar under the antiquated currency-board arrangement, a colonial relic still used by Gibraltar, the Falklands Islands, and St. Helena (territories with a combined population of roughly 40,000). Under this system, the Federal Reserve in Washington, DC, sets Hong Kong’s interest rates and money supply.
The mantra since the handover to China in 1997 has been that this system has served Hong Kong well. But the high rate of asset inflation in Hong Kong is due partly to an undervalued currency, set at HKD7.8:$1 since 1983 (though allowed to trade within a narrow band between 7.75 and 7.85 since 2005). Market forces have set the real effective exchange rate by jacking up asset prices.
Hong Kong, a trading economy par excellence, thrives on market forces. Yet its policymakers remain frozen on the issue of the exchange rate. The betting in Hong Kong today is that, unless Leung can somehow reboot his administration, he is likely to follow Tung in leaving office before his term expires.
Sin-ming Shaw, a former fellow at Oxford University, is an investor based in Asia and Argentina.