HK in tears as Ferragamo struggles to pay rent

French, Japanese and American purveyors of overpriced junk are silent, but Italian luxury goods brands are squealing: Hong Kong’s pro-democracy Occupy Central movement is hurting their profits, and they are pleading with their landlords for rent cuts.

The Italian Chamber of Commerce was in the forefront of the mass-mouth-frothing orchestrated by Beijing’s United Front among overseas business-community shoe-shiners a few months back. Right-thinking people found this distasteful at the time and will have little sympathy if PradSCMP-ItalianBrandsa, Ferragamo and Gucci shrivel up and die tomorrow. Nor will most of us be especially grief-stricken if landlords had to slash rents. It is possible that many of us have some exposure to the property/retail/tourism sector through pension funds, but something deep down makes us feel all warm and happy at the thought of real-estate tycoons’ profits sliding.

It is often wrong to see zero-sum systems at work in economics. A classic example is the ‘lump of labour fallacy’ – the belief that only a fixed amount of work is available, so if one person gets a job, someone else must lose one. The error is to see work (or wealth, or health care, or bananas) as a cake that can only be sliced up 90-10, 50-50, 30-70 or whatever, when you can make the cake bigger.

It’s a lousy metaphor – crummy, indeed. If you could make a cake bigger, you could ‘have it and eat it’, and declare ‘let them eat’ the stuff without sounding crass. Calling it a ‘pie’ (as in ‘chart’) helps a bit. But the principle is correct: unlike energy in physics, which can only be recirculated or redistributed, new wealth can be created.

That doesn’t mean zero-sum is a myth. Every prudent family on a weekly budget has to go without one thing in order to afford another. And economic theories that say everyone should enjoy at least a slice of society’s growing prosperity tend to assume a perfect and open market not distorted by – just to take an example at random – the Hong Kong property cartel.

So we might consider the possibility that in the Hong Kong economy, real zero-sum systems (or at least major I-win-you-lose imbalances) are at work. And the plight of the poor Italian fashion retailers might prompt us to ask about the big-picture role of rents for residential and commercial premises.

We have an artificially tight supply of space, thanks mainly to Hong Kong land policy. And we have an artificially exaggerated demand for space, thanks to Mainland shoppers and ‘investors’ diverted offshore by Chinese policy on private consumption and savings. This means big increases in incomes for landlords. It also means rents have risen far faster than most local people’s ability to pay them. We know all this.

Now take it one step further. Is this a zero-sum game? Can we say that for every dollar extra in rent Hong Kong landlords make, the rest of the Hong Kong community must lose a dollar (or a fixed proportion) out of their pockets, or in purchasing power, or in higher entry barriers to trade?

If true, high rents are a tax on the whole non-landlord population. Anything that reduces rents will therefore be the equivalent of a tax-cut for the vast majority of residents. And any pro-capitalist think-tank will tell you what that means for the economy: higher disposable incomes, more incentives for entrepreneurs, more prosperity for all – a growing cake.

FerragamoTake it one more step. Would it make overall economic sense for a Hong Kong government to commit itself to lower rents as a policy priority? To do whatever it takes: scrapping of the high-land price policy, looser zoning rules, sensible relaxation of building codes, punitive taxes on unoccupied premises and – not least – a bar on Mainland shoppers. In other words, forget all the stuff about ‘pillar industries’ and ‘reputation for free markets’ and just systematically unwind every distortion that pushes rents up.

There would be losers as well as winners, and not all would be Ferragamo (God that stuff’s ugly) or tycoons. But would it on balance benefit the whole economy as measured by, say, median household income/purchasing power, or the propensity of students to camp on the streets? It would be fascinating to know.

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9 Responses to HK in tears as Ferragamo struggles to pay rent

  1. Joe Blow says:

    This morning I was walking the backstreets of Causeway Bay, the area between Occupy and Lee Gardens. You wouldn’t believe how many shopfronts are boarded up, waiting for some schmuck to pay even more rent.

  2. PD says:

    Nice word-play in support of an intriguing suggestion.

    The problem, as I see it is not the zoning and building rules, which are pretty strict. The NT, after all the overwhelming mass of land, has green belts, agricultural land, SSSIs, protected wetlands and country parks galore.

    But these are invariably so much circumvented, subverted, undermined, filled in, ignored as to be virtually meaningless.

    Relaxing the rules, then, would simply mean recognising what is already being done. The effect on reality, as distinct from what is perceived in areas costing $300k per sq m, would, then, presumably be vanishingly small.

  3. Chinese Netizen says:

    I find it highly, highly, highly, HIGHLY unlikely that OC is causing this heartache for the fashion Mafia.
    Nobody really wants to face the fact they stretched themselves too thinly, climbing over each other biting and kicking in order to cash in on the Chinese mainland effect which has been curtailed by A) Xi’s crackdowns, B) an unsure and hesitant Chinese economy with trickle effects to Chinese consumers and, C) more and more Chinese able to easily go to the west or Japan for shopping and realizing prices are LESS in those places!
    Seriously… HK has gone over the top… where else would one see at least TEN Patek Philippe (as an egregious example) boutiques all within ONE square mile (TST)?!?! If this is a brand that is supposed to ooze exclusivity and rarity, then they need to reconsider their HK strategy!

  4. Stephen says:

    These Italian fashion houses could do a lot worse than go to Tung Chee-hwa, the man for all seasons, who will fix everything with his new fantastic think tank featuring noted laureates – Lexus, Semen, Yam … ?

    FFS – how did it come to this that a man who tanked the family business, had to be removed from politics now seems emboldened (or told?) to step back into the limelight where we know that once again he’ll fall flat on his face. Is Donald going to pop up Phoenix like in a few years’ time and tell us that high property prices and the Functional Constituencies are good for us?

  5. Scotty Dotty says:

    @ Stephen

    Agree Tung could never offer anything useful to anyone; even the Yuen Long Mothers Guild (there is one, right?) would stretch his skills.

    But Tung is not about solutions and from his point of view this wankstain Think Tank is low risk for quite a lot of gain. All he has to do is spout out useless reports and position papers now and again which support Beijing, no matter how retarded their position is or how pathetic the reports are.

    In return he gets quite a lot of connections and brownie points. Tung is all about himself and using guanxi for backdoor deals and crookery and all the corruption his traditional Chinese values crave. He’s also got all his kids and their families in the pipeline. This is a good way to gift them a legacy of contacts. There will be lots of younger elites in his fake Think Tank thing. Jake Ma for one stands out.

  6. Joe Blow says:

    Speaking about “think tanks”: I have always wondered how Vagina’s ‘Savantas Policy Institute’ was financed.

    Where is their money coming from ? Do they publish an annual account ?

  7. reductio says:

    Excellent comments all today. But @Stephen, it will of course be impossible for The Don to spring up from anyway because he will be in jail, of course. Well, I think he’ll be in jail. ICAC? Hello…ICAC? Is there anybody there?

  8. Cassowary says:

    You can have a lot of fun with Tung’s think tank’s logo. It’s some calligraphy that says 好. It’s character for “good”, used in Canto to mean “very”. You can add all kinds of stuff to it.

    好差 (very bad)
    好無聊 (very pointless)
    好戇居 (very idiotic)
    好嘥錢 (big waste of money)

  9. Caractacus says:

    Please don’t advocate looser zoning rules or relaxation of building codes. The Planning Dept, Town Planning Board and Lands Dept are already rubber stamping destructive planning applications, especially in the NT and Country Parks. The turning of blind eyes to legitimate environmental and other concerns is outrageous and is certainly a result of improper interference at very senior level.

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