For years, Hong Kong’s economy has been influenced by two major external forces. One is huge and booming China next door, which makes the city a prime location for trade- and investment-related financial and other services. The other is the US, whose currency we essentially use, and which has been recovering painfully from the 2008 financial crisis with the help of ultra-low interest rates set by the Federal Reserve. So we have had the economic performance of a fast-growing powerhouse with a strengthening Renminbi, but a monetary framework tailored to fit a collapsing has-been of a country printing money like crazy to avert deflation.
This mismatch has been a recipe for inflation, not least in property prices. Further distortions have exaggerated this. Hong Kong’s land supply is tightly limited, partly artificially. Its consumer goods are cheaper and better than those across the increasingly open border, attracting shoppers in volumes too large to be accommodated. It goes on: cartels that are legally entitled to conspire to rip off consumers, or public investment in big pointless infrastructure projects that pushes up construction and other costs.
There have been winners and losers. Landlords have enjoyed huge increases in both rental income and the paper value of their assets. Non-owners of property who need somewhere to live and do not qualify for public housing have suffered. The gap between local and overseas housing costs is enough to make people think ‘Why stay here?’ Looking at a real-estate agent’s window in Taipei last week, I thought the prices seemed a bit steep, and the apartments rather small, until I found that what I thought was square metres were ping, a Japanese measurement equivalent to 3.3 sq m or 35 sq ft (based charmingly on the size of two tatami mats).
Hong Kong officials and other residents are virtually conditioned to think that a rising property market creates wealth (it makes some people richer, some poorer – no net impact on GDP). The person who made a 48% gain in a couple of years from selling a unit in City One Shatin is seen as clever. Hong Kong is not alone in having this mentality, but it is extreme here and the place is small; its people are mostly stuck within its confines and at the mercy of these economic forces. Little wonder that the young in particular are angry.
Could relief be on the way? Bloomberg foresees a reversal of Hong Kong’s Chinese boom-American interest rates mismatch coming next year. People were predicting a Federal Reserve tightening this time 12 months ago and 24 months ago, but this year it might actually happen, and the idea of a simultaneous slowdown in China adds a newer twist. Among the possible prospects: a 20% fall in property prices and a permanent reversal in the wretched luxury-garbage retail pestilence, helped by Beijing’s anti-corruption purge. The really cool bit is that US recovery partly compensates for China’s slowdown in terms of our underlying economic growth.
An economy that rewards rent-seeking and arbitrage and penalizes entrepreneurship and innovation can’t last forever. Can it?
I declare the weekend open with the additional joyous thought, alluded to in the Bloomberg article, that more Occupy-Umbrella protests next year could deliver yet further carnage and mutilation to the watches-handbags-crap retail sector. We can but hope.