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Broken Dreams
The
city of refugees was built on the idea that wealth comes
from hard work - and ever-rising real-estate prices.
Those days are over
By RICHARD HORNIK
and CRYSTYL MO |
ALSO
'Industry
Giant': Who could do the job from hell:
chief executive of Hong Kong?
That
Hong Kong Spirit: Chief Secretary Donald
Tsang defends Hong Kong's strengths
Heung Kwok-sing embodied the Hong Kong success story. After
escaping from southern China with his poor family in 1962,
he started a business as a traditional Chinese medicine practitioner.
For nearly two decades, his small business flourished. Kwok
married, had two children and bought a small clinic, where
he still treats patients. Yet today Heung is drowning in $1
million of debt. His mistake? Like tens of thousands of Hong
Kong citizens, he invested a lifetime of savings in real estate
in the mid-1990s, at the height of Hong Kong's property bubble.
"We were so confident about the future of Hong Kong," says
Heung, 46. "I took all my foreign currency, all my old assets
and invested them in property." But today, he says, "I feel
there is no future, no hope for me."
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Marcus Oleniuk For Asiaweek.
The local property market boom has finally gone bust,
leaving thousands out of work and destroying the hopes
of easy wealth for tens of thousands of investors. But
Hong Kong's ability to reinvent itself should not be
underestimated. |
Since 1949, wave after wave of Chinese have risked life and
limb to escape the poverty and oppression of mainland China
for the freedom and opportunity of Hong Kong. The British
colony became known as a safe, fair place to do business,
thanks to its uncompromising rule of law. Even though immigrants
were often reduced to doing menial jobs when they arrived,
they all shared the Hong Kong dream: if they worked hard enough,
they - or at least their children - could one day rise
to be a tycoon as wealthy as self-made billionaire Li Ka-shing.
Today those illusions have been shattered. Since the handover
of sovereignty to Chinese rule four years ago, Hong Kong has
endured a series of blows to people's confidence. Liberals
howled in 1999, for example, when the government allowed Beijing
to reverse an important court decision, fraying belief in
the "one country, two systems" model that supposedly guarantees
Hong Kong's autonomy. More importantly, the Asian financial
crisis sent property prices into a tailspin, and the government
has largely resisted entreaties to bail people out. Apartment
prices have dropped as much as 60% from their 1997 peaks.
As many as 200,000 middle-class people like Kwok now owe more
on their properties than they are worth. Once values drop,
banks often demand higher interest rates, forcing owners to
make higher monthly payments on already loss-making properties.
This is taking a toll on the middle class, the backbone of
the Hong Kong economy. Says Francis Lui, economics professor
at Hong Kong University of Science and Technology, "They have
lost their financial capital, and they have also lost their
human capital to competition from mainland China."
Hong Kong faces a severe crisis of confidence. The economic
downturn has exposed structural problems in the economic system
that have sapped the city's legendary entrepreneurial traditions.
Often lauded as the bastion of freewheeling capitalism, the
city has a surprisingly closed economy. A handful of powerful
banks, holding companies and property developers controls
key markets, driving up prices for everyone else. Many economists
agree that to recover from the current economic downturn,
Hong Kong will have to reinvent itself, weaning itself away
from its disproportionate reliance on property.
Unfortunately, small-scale property investors like Heung Kwok-sing
will suffer even more before the city's problems are solved.
"We are facing the most acute economic problems for many years,"
Chief Executive Tung Chee-hwa said last month in his annual
Policy Address. "Hong Kong faces an accelerated economic downturn,
a rise in unemployment, an increase in the fiscal deficit
and a delayed recovery." The numbers bear him out: GDP growth
will shrink to about 1% this year; unemployment, at a 17-month
high, is 5.3%. This year's budget deficit could run as high
as $12.8 billion, or 7.5% of GDP.
Hong Kong can't blame the new masters in Beijing for its problems.
Before the handover, many analysts predicted that China's
rulers might kill the goose that laid the golden egg by interfering
in Hong Kong's capitalist system. Beijing has kept its hands
off. The problem is that China is developing - and creating
opportunity on the mainland - so fast that Hong Kong's gateway
role is diminishing by the day. The Hong Kong real-estate
bubble was based at least partly on the ability of local firms
to charge a premium for services to outsiders looking to strike
it rich on the mainland.
Hong Kong manufacturers have been heading across the border
since the early 1980s. The service sector grew because of
Hong Kong's role as an intermediary for trade with China.
"Before, Hong Kong had a monopoly on services for southern
China," says Vincent Chan, head of China economics and strategy
at UBS Warburg. "But thanks to lower real-estate prices and
labor costs, Chinese cities can provide them for a lot less
money."
That new challenge couldn't have come at a worse time, as
Hong Kong faces a sharp downturn in foreign trade. Bankruptcy
rates have gone through the roof - August's personal bankruptcies
were greater than the whole of 1997. The economic decline
is beginning to feed on itself. "We have maybe a half-million
people in the middle income group who are the pillars of society,"
says James Tien, chairman of the Liberal Party. "If this group
is in trouble, if they are not spending, then this threatens
all of society."
The optimist's view of Hong Kong's current predicament is
that the city is in the midst of its third post-World War
II transition. The first came after 1949, when Hong Kong became
the escape hatch for the mainland's displaced capitalists,
largely from Shanghai. The second began in the 1960s, when
Hong Kong became Southeast Asia's first sweatshop economy.
Says Hong Kong civic activist Christine Loh: "Now we are in
the last stage of exiting that period, but we don't really
know what lies ahead."
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In spite of that uncertainty and the frayed nerves of its residents,
it would be foolish to bet against Hong Kong's ability to reinvent
itself. The city-state has a critical mass of human capital,
attracting ambitious, talented people from around the world.
It remains Asia's leading container port and will be for years
to come. It is still the financial capital of Asia, outstripping
Tokyo and leaving Singapore far behind. Its legal system has
been dented by confrontations with Beijing, but its independence
remains intact. And, most importantly, says David Dodwell, a
contributor to The Hong Kong Advantage, "What really underpins
Hong Kong as an economy is its almost unsentimental willingness
to change."
But shifts of this magnitude require strategic guidance from
the government - a sense that somebody knows where Hong Kong
is headed. Increasingly vocal critics complain that Tung Chee-hwa's
team has been floundering. The government, while composed of
skilled civil servants, is still learning how to govern; until
1997 all strategic decisions were made in London. The ordinary
Hong Kongperson these days has little faith in the government's
vision. "The trouble is that in the past things just naturally
improved after downturns, the government only had to tell people
to have confidence," says Nelson Chow, a sociologist at the
University of Hong Kong. "But now for the chief executive to
tell the people not to lose their confidence - this just sounds
so empty." Says Simon Shi, president of the Hong Kong Small
and Medium Enterprise Association, "[My members] are very worried
and angry, and they are feeling the government is no good."
It doesn't help that the government continues to believe -
despite recent initiatives to help Shi's members - that what
is good for the tycoons is good for the city. Hong Kong has
always been run by and for its commercial interests - first
the British trading houses, or hongs, and lately the Hong Kong
tycoons. Former governor Chris Patten's efforts to democratize
the colony in the last few years of British rule were opposed
as much by tycoons like Li Ka-shing, who famously threatened
to pull out his investments at one point, as by Deng Xiaoping.
And critics say Tung Chee-hwa is as beholden to the top taipans
as to the mandarins in Beijing. After all, he owes the rescue
of the family shipping company from bankruptcy in 1985 to both
in equal parts.
The upshot is that Hong Kong's economy is intimately tied up
with the government. The most obvious example of that is the
real-estate sector. The billionaires are rich because of property
development, the proceeds of which have also filled the government's
coffers. Although this keeps taxes down - less than half of
the populace pays any salary tax at all and few pay the top
rate of 15% - high rents form an oppressively high levy, which
squeezes consumers and small and medium-sized businesses.
The government often protects major local players. Chek Lap
Kok, Hong Kong's fabulous new $20-billion airport has great
aspirations to be a regional logistics hub, and the government
has said it will invest even more money toward that goal. But
foreign air cargo companies are put off by the inability to
do onward shipping from here. The problem stems from the government's
attempts to protect Cathay Pacific, the airline owned by one
of Hong Kong's oldest conglomerates. Says Frederick W. Smith,
CEO of FDX Corp, parent of FedEx: "It's absolutely necessary
for Hong Kong to liberalize its air cargo aviation regime if
it wants to be a logistics center for the modern high-tech and
high-value added world."
In spite of playing against a stacked deck, most Hong Kong people
have embraced a system that favored the rich, confident they
too would benefit. Many did. The booming property market made
Hong Kong dollar-millionaires out of tens of thousands of middle-class
families. It also has spawned a huge industry employing over
164,000 workers, doing everything from surveying to construction
and sales. But the high cost of real estate means Hong Kong
firms have a tough time competing with regional neighbors, and
increasingly that includes southern China. Hong Kong companies,
large and small, have thus far found only one sure answer: move
north. Smaller firms relocate lock, stock and barrel to Guangdong
province. Larger ones, like Cathay Pacific and HSBC, have moved
back-office activities to Shenzhen. The migration south into
Hong Kong of the past 50 years is going into rapid reverse.
To be fair, although Tung's administration has avoided crossing
the developers, the tycoons aren't the only ones who have become
addicted to the easy money in real estate, long the lifeblood
of the Hong Kong economy. About 30% of the annual budget comes
from land auction revenues alone. Government taxes on property
(government rates) and stamp duties from transactions earned
$2.3 billion, 8% of revenues, last year. That reliance will
be hard to break. Says Selina Sia, vice president, Hong Kong
property research at brokerage SG Securities: "The government's
dependence on real estate for revenue has not left them much
choice. Right now is not the right time to adopt new tax measures
like a sales tax to diversify the tax base."
The government still has almost HK$400 billion in reserves,
so it can postpone that switch. But the private sector is facing
the reality that the days of the property bubble will never
return. "I've been in construction 30 years, and this is the
worst I've ever seen it," says Patrick Chan, secretary-general
of the Hong Kong Construction Association. "In the paper today,
a well-known contractor has announced it will lay off 80 staff.
It was supervisors and managers - the last people you want
to fire." An oversupply of flats has led to unprofitable sales
for developers. All sorts of sales gimmicks - ranging from
free cars to special raffles and zero-down payment mortgages
- have failed to jump-start demand.
Thousands of households across Hong Kong have been squeezed
far harder. Perhaps the most striking effect of economic downturn
is the psychological impact of insurmountable debt, job loss,
and constant worry over bills. Suicide hotlines are getting
more calls from middle-class wage earners. Finance-related suicidal
cases have been pouring in to social service agencies. Says
Priscilla Lee, a social worker with Caritas Family Service,
"Once people lose their financial stability, they feel it affects
their entire role as a father or mother or responsible person."
"I've been watching social change in Hong Kong for the last
30 years," says sociologist Chow. "We have always been able
to tell ourselves things are improving, things will be rosy.
But now I feel the mood is very gloomy. Every person is saying
things will only be worse next year."
To get out of the mess, Hong Kong people will have to develop
a new mindset. They will need to accept that the old get-rich-quick
real-estate game is up. They will have to devise strategies
to deal with the fact that Hong Kong is no longer the last free
outpost off mainland China. Chief Executive Tung has tried to
offer some hope by reducing property taxes and promising job
creation and retraining schemes. But those initiatives will
have only marginal impact.
Hong Kong still has plenty of prospects, if it plays its cards
right. The government has spent millions on a rebranding designed
to push Hong Kong as a "world city." If Hong Kong loses that
special status, it could fade away as just another Chinese city.
At the same time, economists agree that its greatest asset is
the proximity to southern China. Says Joe Lo, Citibank senior
economist, "Hong Kong has to depend on the Pearl River Delta."
Hong Kong business and political leaders might balk at such
a limited destiny, but in fact, Guangdong province is one of
the most dynamic regions in East Asia today. After WTO accession,
the affluent consumers of the Pearl River Delta will be the
prime targets of every foreign company hoping to crack the China
market.
Hong Kong is perfectly placed to take advantage of that onslaught.
Although south China is developing rapidly, it still lacks the
legal, financial and logistical infrastructure that only Hong
Kong can provide. The trick will be to figure out how to become
more integrated with the Pearl River Delta while still protecting
those distinct advantages. But Hong Kong people are masters
at walking political tightropes.
The more pressing issue is whether they will want more integration
with China. Many Hong Kong people, after all, still think of
their city as a refuge from the mainland. A recent opinion poll
found that fewer than 20% of high school students think of themselves
as Chinese. Asks Christine Loh: "How can we plan for Hong Kong's
relationship with southern China when people are not emotionally
prepared to face that question?" Deflated property values and
hard times have begun to prepare the residents of Hong Kong
to accept the need for radical change. The bubble has burst.
It's not the end for Hong Kong. But it's time to wake up from
the old dream and confront a new reality.
With reporting by Alexandra A. Seno
 
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