Commentary: How The Tycoons Are Hobbling Hong Kong

When Li Ka-shing talks, Hong Kong listens. So when the billionaire tycoon recently complained that local politicians were souring the business climate, he rattled a community already shaken by its worst recession in decades. Although his criticism was vague, many believe he was targeting outspoken members of the populist Democratic party. Because of the shift in political sentiment, Li said, he was unlikely to invest in a new $1.3 billion project in Hong Kong.

Li may be lamenting the business community's lack of clout, but how much more influence does he want tycoons to have? After all, China backed shipping tycoon Tung Chee-hwa to become Hong Kong's first chief executive. The legislature is also designed to favor pro-business groups. Li is apparently annoyed that some Democrats are protesting his intention to sue buyers who defaulted on apartment purchases. Fair enough: Li has every right to take them to court. But for him to conclude that his woes stem from Hong Kong's exercise of democracy is puzzling. If anything, Hong Kong may be a less desirable place to do business now because of the influence property tycoons wield.

Just look at the record of Tung, who is tycoon-friendly. He has been governing during an unprecedented meltdown, but he and top bureaucrats have made things worse by damaging Hong Kong's policy of nonintervention. Previously, the government provided the infrastructure needed for business to thrive, but steered clear of picking winners and losers.

But in the past year, the government has intervened in ways that favor the big property tycoons. It has stopped releasing state land onto the market to keep prices from falling further. Tax breaks and subsidies to new buyers now encourage apartment purchases. Yet while property prices have dropped 50%, they are still extremely high. Dresdner Kleinwort Benson chief economist Geoffrey Barker estimates that it would take another 50% drop to reach levels the average resident could afford. One legitimate concern is that another plunge in real estate prices will endanger banks. But instead of figuring out how to let prices drop to affordable levels while restructuring the banks, the government just wants to maintain the market--which benefits the tycoons.

Perhaps the most egregious decision was the government's purchase of $15 billion worth of Hong Kong stocks in August, many of them property companies. While the Hong Kong Monetary Authority claims it moved to stave off speculators and not prop up the bourse, it severely damaged the city's reputation for hands-off rule. Now, the government is a major shareholder in companies run by heavyweights such as Li. The potential conflicts of interest are enormous.

Underpinning these actions is the belief that property is the true source of Hong Kong's prosperity. Yet, in reality, it is Hong Kong's weakness. Property companies dominate the Hang Seng Index. Bank portfolios have tremendous exposure to the real estate market. The government itself depends on property-related income for an estimated 50% of its revenue. Such a distorted market may have been acceptable when interest rates were low and money was cheap. It's not any longer. "Hong Kong is at the end of an era," says Barker. This is not a cyclical downturn in property prices, but a "multiyear downtrend," he says.

NOSTALGIC. That leaves the city in the throes of an identity crisis: if not property, then what? There is talk of turning Hong Kong into a high-tech hub. But the best option is to step up efforts to become the business service center for China. The sooner Hong Kong broadens its economic base away from property, the faster it will revive. There is more pain to come, but it's better than The real issue for tycoons like Li is not whether democracy is harming Hong Kong, but whether Hong Kong can remake itself. The tycoons may be nostalgic for the old days when the British assured that political and business interests were nearly identical. But Hong Kong isn't a colony anymore--and it shouldn't behave like one. Pandering to the property developers is not only a relic of a bygone era, but a dangerous path to take.

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