China addicted to Hong Kong’s ‘opium’

Posted on August 5, 2012

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HONG KONG (August 4, 2012) – In an analogy, Hong Kong can be likened to a small cat and mainland China to a giant tiger, when compared by their geographical size and economic strength. Interestingly, the analogy may remind one of a popular Chinese fable. It goes like this:

In the Middle Kingdom, people believe that, in the beginning, the tiger was weak and clumsy though big in physique, while the cat was smart, agile and skillful in capturing prey, albeit small. Despite the differences, the two were good friends.

So one day, the tiger asked the cat to teach him kung fu. The cat agreed and was patient in teaching the tiger, which gradually learned how to stalk, run, jump, roll, grasp, tear, and strike as well as the cat. The tiger thought he had already learned all kung fu techniques from the cat, and an idea came to his mind: “I’m so much bigger than the cat. I will become peerless if I can get rid of this small cat.”

So one day when the cat was taking a nap, the tiger stood up and approached the cat viciously. Just as that moment, the cat opened up its eyes, immediately realized what the tiger was trying to do, and swiftly climbed up to the top of a tall tree. “I have kept the last technique of the tree climbing from you just in case,” the cat loudly told the tiger, which watched under the tree helplessly.

The first part of this fable may be said to vividly describe the relationship between Hong Kong and mainland China. It is a fact that in the past three decades mainland China has learned all the techniques from Hong Kong for building a capitalist-style free-wheeling market economy. Given its size and with its success, the mainland has inevitably become stronger and more powerful – to the point where it is now the world’s second-largest economy.

The second part of the story may not be accurate is but relevant to the relationship between Hong Kong and the mainland. China’s taking back Hong Kong in 1997 was non-violent and legitimate, as it was internationally recognized. However, many in Hong Kong still think that the city, like the cat in the fable, has reserved some things to enable itself to keep away from the tiger: in particular, the rule of law and freedom. This will also be at Beijing’s mercy when its commitment to “one country, two systems” expires in 2047, but that will be another story.

Here we’d like to examine how the mainland, the tiger, has learned from the cat, Hong Kong, how to develop a market economy.

When Deng Xiaoping initiated his economic reform and opening up in late 1970s, he apparently thought of Hong Kong as a model for economic (not political) development, as he said later in 1988: “Now there is one Hong Kong; we must create several more ‘Hong Kongs’ on the mainland. That is, we must further open up.” [1]

To lure foreign investment and learn about the operation of capitalism, Deng approved the establishment of four Special Economic Zones (SEZs) in 1980: Shenzhen, bordering Hong Kong; Zhuhai, bordering Macau; Shantou, in east Guangdong (with an eye on attracting investment from overseas Chinese in Southeast Asia); and Xiamen, in Fujian (to attract investment from Taiwan). Shenzhen SEZ is by far the most successful, largely because of its proximity to Hong Kong.

At the initial stage of economic reform and opening up, for the purpose of capital accumulation, China had also learned from Hong Kong to introduce foreign-invested, re-export-oriented, labor-intensive processing industries.

At that time, Hong Kong’s processing industries began to suffer from increasing land and labor costs, so investors there were happy to move their factories across the border. At the peak time in 1980s and 1990s, it was estimated that there were about 100,000 Hong Kong-invested re-export enterprises, mostly small or medium-sized, in Shenzhen and the rest of the Pearl River Delta area.

Hong Kong investment brought into the mainland not only capital but also, more importantly, knowledge of modern management and trade, which helped China to build up a legal system governing foreign investment and trade to enable the country to further open up to the world.

Furthermore, Hong Kong also served as a model for China to privatize its property sector. In the early 1990s, Beijing decided to privatize the country’s property sector (until then all housing was virtually state owned), but it faced a dilemma: China insisted at that time and still insists today that it is a socialist country.

The core of socialism is public ownership, so under the Chinese constitution all land belongs to the state. To privatize housing property would mean to abandon socialism, but without privatizing the real estate sector, China’s market-oriented economic reform and opening up would stand stagnant as a private property sector is an important part of a market economy.

In this regard, colonial Hong Kong’s system provided a perfect solution for socialist China. Under British colonial rule, most of the land in Hong Kong belonged to the “Crown”. One could only rent, or buy the right to use a land lot, from the “Crown” for a certain period of time, and a land premium had to be paid if one wanted to continue to use it after the original contract expired. Thus selling and reselling the land-use rights became an important source of financial income for Hong Kong government. The system continues today.

It can be said literally that Beijing has simply copied Hong Kong’s land system in its privatization of the property sector. Today in China, if you say you have bought a piece of land, it actually means you have bought the right to use that piece of land for a certain period of time, for legally all land still belongs to the state. Likewise, when one buys a house or flat in a building, one does not own the land (proportionally in the case of owning a flat) on which the house or building is erected.

But there is a fatal defect in Hong Kong’s land system. During colonial times, the British simply saw Hong Kong as a “borrowed place” for some “borrowed time”, so they did not care about long-term development. With limited sources of income, the design of the land system enabled the British Hong Kong government to have sufficient income to sustain its operation.

I need my (land) fix
In practice, it proves much easier for a city government to produce income by selling public land than collecting taxes or making efforts to create other sources of income.

But this also proves addictive – like “opium”. Inherited from the British, today’s Hong Kong government still has heavily relies on land premiums as its main source of income. The more it increases spending on social welfare under growing populist pressures, the more it has to rely on property development unless it can create other sources of income.

Nowadays, we see governments of many cities in mainland China also become addicted to this Hong Kong-style disposal of land. Many cities rely on land premium incomes to build subways and other infrastructure projects. It is too tempting not to do so. The more a city government spends, the more it has to rely on land premium income. Given China’s autocratic system, it is much easier for a city government to take back a land lot from people who live or farm on it with little compensation. In this regard it can be said “the pupil excels the teacher”.

But this has resulted, as widely reported, in abuse of power, injustice, corruption and skyrocketing housing prices. From this perspective, it is also not hard to understand why city governments are resistant to Beijing’s repeated tough orders to bring down housing prices, for a downturn in the property market would mean less land premium income for a city government.

Now seems to be the time for the mainland to reform its land system to get rid of that “opium” – or defect – imported from Hong Kong. China is such a huge country with such a huge population and so many cities, it must not run a property market like Hong Kong.

Hong Kong may have provided many good examples of economic development for China. It is time for Beijing to draw a lesson from Hong Kong’s bitter experience of making property development the “pillar industry” of the city.

Note:
1. Click here for full text (in Chinese).

The myth of a free Hong Kong economy

HONG KONG – Open any standard economic textbook and look for the definition of a free economy; its key characteristic is the lack of government intervention. Less state intervention means a freer market.

On this standard, Hong Kong has been hailed as the world’s freest economy for more than two decades. But is this the whole truth? What if the main sectors of the whole economy are dominated by a few oligopolies or even a virtual monopoly?

Let’s look at the hypothetical case of Mr and Mrs Chan, an average Hong Kong household. Both Mr and Mrs Chan are senior-level employees of the Hong Kong government and earn a total monthly salary of HK$85,000 (US$10,900).

The Chan family bought a 800 square feet (74 square meters) flat from Cheung Kong (owned by the richest local tycoon, Li Ka-Shing) and has to pay a mortgage of HK$30,000 a month. The couple subscribes to the 3shop mobile phone service, a subsidiary of Hutchison Whampoa (also owned by Li) and pay a monthly service fee of HK$2,000.

Wherever they go to buy their daily necessities, they use Park’n Shop (a supermarket chain owned by Li), where they spend about HK$5,000 every month.

Whenever the Chan family pays their electricity bill (HK$1,000 per month), it goes to Hong Kong Electricity (again owned by Li). For pharmaceutical products, they go to Watsons (again owned by Li), and they spend HK$2,000.

Let’s say the couple wants to purchase the latest LCD monitor for their son; they buy it from Fortress (still owned by Li). The couple subscribes to the paid TV service of NOW for HK$1,000 a month. This time the service is not owned by Li himself, but rather Richard Li, his youngest son.

One might ask: how come that almost half of what Mr and Mrs Chan earn contribute to the coffers of Li Ka-shing? Do we really want to call this the freest economy in the world, or even a free economy?

A gilded cage?
In every poll, Hong Kong is invariably ranked as among or the most expensive city in Asia – usually behind Japanese megalopolises like Tokyo and Osaka. It’s at least the fifth-priciest in the world to own a home; [1] the second priciest to rent an apartment; [2] and Queen’s Road Central and Canton Road are the second costliest for retail space. [3]

This is due to what is informally known in Hong Kong as a “high land price policy”.

Lee Shau Kee

The mirror image of this policy is, inevitably, inequality. Hong Kong boasts some of the world’s top billionaires, such as Li Ka-shing, the Kwok brothers and Lee Shau-Kee. At the same time no less than 18% of the city’s seven million residents lived below the poverty line in 2011 – which was measured as HK$7,000 for a three-person household per month, according to the Hong Kong Council of Social Service. [4] About 100,000 people lived in dreaded cage or cubicle homes last year. [5] This may be a sensationalist approach, but the photos do tell the story. [6]

For all the glitz and glamour that dazzle not only global tourism but also, especially, mainland Chinese tourists, the median monthly income of a local household with four members is approximately HK$14,000, according to the Hong Kong Council of Social Service.

After a lengthy battle, a new minimum wage was approved. There were rivers of speculation on what would be a decent number – from HK$30 to HK$35 an hour. The approved figure in May 2011 was a paltry HK$28.

After the 2008 global financial crisis, Hong Kong’s much vaunted economic recovery is essentially based on revenues from Chinese tourism and property investment. A trickle-down effect is not exactly in place; it’s more like “rental-push” inflation, as Hong University researchers call it. Mainland Chinese gobble up at least 40% of new home sales. No wonder; property investment qualifies as the easiest path to get a much coveted Hong Kong resident card.

The land of the free

Li Ka-shing

For the Heritage Foundation is a matter of routine to rank Hong Kong as the freest economy in the world – with a whopping overall score of 89.9 compared with a world average of 59.5. [7] This Milton-Friedmanesque paradise is extolled for “small government, low taxes and light regulation”.

Much is made of “business freedom” and “labor freedom”. True – you can open a business in three days; you just need a Hong Kong ID, a form and US$350. But depending on the business, you will be squeezed by monopolies and oligopolies in no time. And if you are “labor”, chances are in most cases you can only aspire to some sort of glorified slavery.

Heritage researchers may be excused for losing the plot between dinners at the Mandarin Oriental and partying in Lan Kwai Fong, both favored drinking and dining spots near the central business district. Behind all those luxury malls and the best bottles of Margaux, real life Hong Kong has absolutely nothing to do with a free economy encouraging competition on a level playing field. It’s more like a rigged game.

The dark secret at the heart of Hong Kong is the unmitigated collusion between the government and a property cartel – controlled by just a few tycoons; the Lis, the Kwoks, the Lees, the Chengs, the Pao and Woo duo, and the Kadoories (more about them on part 2 of this report). These tycoons and their close business associates also happen to dominate seats on the 1,200-member Election Committee that chooses Hong Kong’s chief executive.

The first thing to keep in mind is that for any Chinese, land is wealth. That’s sacred. And nowhere else this is more sacred than in Hong Kong.

Alice Poon is – or used to be – an insider; she was a personal assistant to Kwok Tak-seng, the legendary founder of Sun Hung Kai Properties, Hong Kong’s giant developer. She also worked for the Robert Kuok group, responsible for land and property evaluation and acquisition. She now lives in Canada and blogs at the Asia Sentinel. [8]

In Land and the Ruling Class in Hong Kong (Enrich Professional Publishing, Singapore, 2011), Poon demonstrates how the Heritage Foundation’s hard-on for government laissez faire is in fact mixed with an extremely non-competitive business environment. It all boils down to who really runs the show in Hong Kong; a group of cross-sector corporate giants controlling the property market, electricity, gas, the public buses and ferries, and the supermarkets (see them in detail in part 2 of this report).

The common denominator is that virtually all of them started with property – and then progressively gobbled up utility and public service companies.

Here are just a few examples of this cross-sector frenzy.

  • Cheung Kong Holdings buying Hutchison Whampoa in 1979 – a monster conglomerate involved in myriad businesses, among them the Park’n Shop supermarket chain.
  • Sun Hung Kai Properties controlling the Kowloon Motor Bus operator.
  • Lee Shau-Kee accumulating shares in The Hong Kong and China Gas – the town gas monopoly – before the company was listed in 1981.
  • Hutchison Whampoa buying Hongkong Electric – one of the two electricity duopolies – in 1985.
  • New World Development being awarded the Hong Kong public bus routes franchise in 1998 and buying Hong Kong Ferry in 2000.
  • The Pacific Century Cyberworks (PCCW) takeover of Hong Kong Telecom in 2000, masterminded by Richard Li, the younger son of Cheung Kong Holdings chairman Li Ka-shing, the wealthiest Chinese in the world.

The bottom line is that major utilities and public services are in the hands of just a few players; the Lis of the Cheung Kong/Hutchison group; the Kwoks of Sun Hung Kai Properties; the Lees of the Henderson group; the Chengs of New World Development; the Pao and Woo of the Wharf/Wheelock group; and the Kadoories of the CLP Holdings group.

Today, there are 49 constituent companies in the Hang Seng Index, which represent nearly 70% of total capitalization of the Hong Kong Stock Exchange. Taking away heavyweight Chinese state-owned enterprises such as China Mobil, China Unicom, PetroChina, Sinopec, ICBC, China Construction Bank, Bank of China, China Life, etc (which account for more than half of the total capitalization), and Britain’s HSBC, the Hang Seng Index is dominated by local companies of property development tycoons such as Li Ka-shing’s Cheung Kong Holdings, Hutchison Whampoa and Power Assets; the Kwok family’s Sun Hung Kai Properties; Lee Shau Kee’s Henderson Land Development and Hong Kong and China Gas; as well as other property developers such as Sino Land, New World, Hang Lung Properties, and Warf (Holdings).

This amounts to roughly six families controlling virtually all of Hong Kong’s economic sectors. And it will stay like this. The Chinese tradition of passing the family fortune from generation to generation amounts to what Poon derides as an “antiquated feudal system”.

There’s nothing “free market” about Hong Kong’s major utility/public service companies. On the contrary; they are monopolies or oligopolies. The two supermarket chains – Park’n Shop and Wellcome – have no less than 70% of market share. City Super is owned by Japanese – but that’s an upscale brand, with only a few locations, and out of reach for most Hongkongers.

Park’n Shop and Wellcome consolidated their dominance essentially by pricing smaller companies out of the market; they could easily afford it. Park’n Shop is the retail/food division of A S Watson, which is part of the Hutchison/Cheung Kong conglomerate. Wellcome is part of the Jardines/Hong Kong Land group. So no wonder, for instance, a Park’n Shop outlet is in or around every building developed by Hutchison or Cheung Kong.

A measure of their power is that France’s Carrefour – the second-largest global supermarket chain – tried to break into the Hong Kong market in 1996. They gave up four years later.

Born to lose
We should be back again to a Chinese maxim: land is power. All the conglomerates controlled by Hong Kong tycoons are fattened on owning land. The local government is the sole supplier of land. So no wonder it keeps a vested interest in the property market – and that’s a huge understatement – as it pockets fortunes from land sales and premiums on so-called “lease modifications”.

As for the maxim that prevails across the city’s property market cycles, it’s always been the same: “Buy low and sell high”.

This doesn’t work for the public good – to say the least. A good example is the Guangzhou-Shenzhen-Hong Kong express rail link, which is bound to be the most expensive in the world, costing US$8.6 billion – partly because of choosing to build the terminus at West Kowloon. There was a cheaper and perhaps better alternative – to build the terminus at Kam Sheung Road on MTR’s West Rail. But it was overruled because of, as some critics suspected, shady land speculation interests in West Kowloon.

The whole situation is in fact inherited from the British colonial era, when the British hongs such as Jardines, Hong Kong Land, Wheelock Marden, Swire and Hutchison controlled Hong Kong’s economy – and prime urban space. This Holy Grail was beyond the reach of Chinese companies.

But then, from the late 1960s up to the mid-1970s, the hongs started to get rid of their land and property as China plunged into chaos during Mao’s final years. At the same time, Cheung Kong, Sun Hung Kai, New World Development and others started using the stock market to raise funds.

But it was only by the mid-1980s that British companies were finally gobbled up by the likes of Li Ka-shing and Y K Pao. When the Sino-British Joint Declaration was signed in December 1984, sealing the 1997 handover, they finally hit the jackpot.

The champagne popped all around Paragraph 4 of Annex III of the Joint Declaration; it limited the amount of land that could be granted in Hong Kong in any one year to just 50 hectares. That also paved the way for a Land Commission, which could grant extra land when the ceiling was attained. Essentially this set up guaranteed that land in Hong Kong would always be in short supply – thus it would always be expensive. Ergo, the perennially high property prices.

The mantra of the previous two Hong Kong administrations under “one country, two systems” – by Tung Chee-Hwa and Donald Tsang – was not to deviate from a high land price policy; keep a tight land supply; and postpone the introduction of a competition law (more on this on the second part of this report). There’s no evidence this would change much under new Chief Executive C Y Leung.

The absurdly high rents in Hong Kong – derived from high land prices – hurt most of all local businesses, and prevent Hong Kong from attracting more foreign investment. If Heritage Foundation researchers didn’t get it, they were probably researching some island in the South China Sea.

Everything that revolves around land represents the main underlying cause for industrial and economic concentration in Hong Kong. When property prices and rents are that high, they contribute to high living and business costs. Wealth disparity gets out of control – the key popular grudge of anyone who is not a millionaire in Hong Kong. [9]

The average Hongkonger – whose median household monthly income is US$1,800, much less than our fictional Mr and Mrs Chan – not only is bound to lose in the property game but also gets to pay high prices for basic daily necessities.

Hong Kong’s very simple tax structure – 15% for individuals, 16.5% for corporations – may have been OK for its early stages of economic development. Now that Hong Kong is relatively wealthy in annual GDP per capita terms (over US$45,000), but with a large proportion of its population living below the poverty line, it doesn’t make sense anymore.

It’s enlightening to note that this average annual per capita GDP figure is double the annual household income of an average Hongkonger.

The bottom line points to a fact that should make the local ruling elite – not to mention Beijing – quite uncomfortable. Without a real democratic government, elected by Hong Kong people, there’s no way Hong Kong will ever reform its land and tax system. The “freest” economy in the world will continue to be a battle pitting a wealthy oligarchy against a large majority essentially struggling for survival. NEXT: The rulers of the game

Notes:
1. 10 most expensive cities to own a home, Overseas Property Mall, Feb 24, 2009.
2. Top 10 Most Expensive Cities to Rent an Apartment in Asia, PropGoLuxury, May 16, 2012.
3. Photos: World’s priciest places to rent retail space, Vancouver Sun, Jul 10, 2012.
4. 1 in 5 live below poverty line, welfare body says, South China Morning Post, Sep 15, 2011.
5. Cage homes ‘worse than living on street’, South China Morning Post, May 24, 2011.
6. Cage dogs of Hong Kong: The tragedy of tens of thousands living in 6ft by 2ft rabbit hutches – in a city with more Louis Vuitton shops than Paris, Daily Mail, Jan 11, 2012.
7. 2012 Index of Economic Freedom: Hong Kong, Heritage
8. An Estranged Hong Kong, Asia Sentinel, Jan 19, 2012.
9. Hong Kong Middle Class Bitter as Tycoons Choose Leaders, Bloomberg, Mar 23, 2012.

The rulers of the Hong Kong game

HONG KONG – Life is indeed sweet if you’re a Hong Kong property tycoon. In what is routinely considered the “freest” economy in the world, an oligarchy of property developers sets supply and pricing (see part 1 of this report). This applies not only to residential apartments but also to shopping malls, hotels, luxury serviced apartments and industrial and office space.

Top financial muscle rules. It gobbles up Hong Kong’s best locations – near mass transit systems or by the spectacular waterfront. Behind the façade of all those glitzy malls though, life is very hard. Retail tenants pay not only a base rent but also a surplus rent when business turnover reaches a certain level. You can’t go wrong – if you’re the owner, not the tenant.

Now let’s meet the six families who essentially run the Hong Kong show.

The Li family – Li Ka-shing’s family controls, among others, Cheung Kong Holdings, Hutchison Whampoa, Hong Kong Electric, Cheung Kong Infrastructure, CK Life Sciences, the popular website Tom.com and PCCW. The market capitalization of these companies – everything from property development to ports, energy, telecom, hotels, retail, manufacturing and infrastructure – is (excluding PCCW) about HK$852 billion (US$110 billion), accounting for nearly 5% of the total capitalization of HK$18.5 trillion of the Hong Kong stock exchange (as of mid-July). It’s always important to remember that mainland Chinese enterprises listed in Hong Kong account for more than half of the total capitalization of the Hong Kong stock exchange.

Li Ka-shing, born in 1928 in Guangdong province, charismatic, a flawless negotiator and a renowned philanthropist, is a larger-than-life character. He’s the world’s 16th wealthiest individual, according to Forbes, with a net worth of US$21.3 billion. His companies are active in over 50 countries. Li’s two sons, Victor and Richard, got the requisite US education. Li is the chairman of Cheung Kong Holdings and Hutchison Whampoa. Victor is the chairman of Cheung Kong Infrastructure and CK Life Sciences. Richard is the chairman of PCCW.

Cheung Kong Holdings has been a top developer in the city since the 1960s. Victor keeps a low profile, unlike Richard, who at 27 became a superstar in 1993, when he sold Star TV – very popular across Asia – to Rupert Murdoch’s News Corporation for US$390 million. Needless to say, Star TV – where he previously worked – was established by Li Ka-shing.

Richard used some of his profits to set up the Pacific Century Group and later PCCW. In 1999 – backed by the Hong Kong government – his group set out to build a much-ballyhooed “cyberport” for US$1.7 billion. But what was really juicy was a monster US$28.4 billion merger with Hong Kong Telecom in 2000 – widely promoted in Hong Kong as a “deal of the century”. Beijing totally encouraged it; after all, the competition for the deal was Singapore Telecom. Yet after the PCCW-HKT mega-merger the high-tech bubble burst – and the famous cyberport project came down to nothing.

The Kwok family – Sun Hung Kai Properties was founded by Kwok Tak-seng, another high-profile Cantonese from Guangdong province who started in business as a trader in the early 1950s and got into property development in 1958. A legendary workaholic, he died in 1990 and left three sons – Walter, Thomas and Raymond; the first two were educated in Britain, and Raymond in the UK and the United States.

The Kwok family controls Sun Hung Kai Properties, Transport International Holdings and Smartone Communications (the city’s third-largest mobile phone company). These companies have a market capitalization of HK$266 billion as of July 26.

Sun Hung Kai is the largest property developer in Hong Kong – controlling over 100 companies involved in construction, property management, electrical and fire services, architecture, mechanical engineering, cement manufacturing, finance and insurance.

They’re into everything from flatted factories to mega-malls and larger-than-life office towers such as the International Finance Center (IFC) at the Airport Railway Hong Kong station. Sun Hung Kai has 47.5% of IFC towers 1 and 2; Henderson Land also has 47.5%. On top of it, Sun Hung Kai holds a 100% interest in the development of Kowloon Station. Attached to it is the new International Commerce Center (ICC), another post-modern Hong Kong landmark with a Ritz Carlton on top (“the highest hotel in the world”).

The three billionaire Kwok brothers used to be regarded as an iron triangle. Now a bitter family feud plus corruption charges have dissolved the dream. Brothers Thomas and Raymond have recently been charged with bribery and public misconduct – one of the highest-level corruption cases in Hong Kong’s history, and a graphic illustration of what’s wrong with the tycoon/government collusion model.

And yet, instead of hiring top professional managers to contain the damage, the family appointed two of the Kwoks’ sons – ages 29 and 31 – as alternate directors. Their business record is virtually non-existent. Back to that Chinese maxim; it all stays in the family.

The Lee family – Lee Shau-Kee, yet again from Guangdong province, started in the footsteps of his father, a gold trader and money exchanger, until getting into property development in 1958 with Kwok Tak-seng and Fung King-hey – very popular locally as “the three musketeers” (until they split in 1972).

Lee then established Wing Tai Development – whose flagship company was Henderson Land. Today his key companies are Henderson Land, Henderson Investment and The Hong Kong and China Gas Company, which have a market capitalization of HK$257 billion (as of July 26). Lee is the chairman of all three. He’s the second-wealthiest of the Hong Kong tycoons, behind only Li Ka-shing, with a net worth of US$19 billion according to Forbes.

Henderson Land attacks with gusto the small and medium-sized residential apartment market. Their preferred strategy is to buy out apartments one by one in targeted old residential buildings in some of Hong Kong’s top areas – such as Wan Chai, Causeway Bay and the Mid-levels.

Once again it’s all in the family. Elder son Lee Ka-kit – educated in the UK – is vice chairman of two of the companies, and chairman and president of the other. He’s in charge of an absolutely crucial division – the group’s property development interests in mainland China, mostly in Beijing, Shanghai, Guangzhou and the Pearl River Delta. Meanwhile, younger son Lee Ka-shing and daughter Margaret are climbing their way up inside the group.

The Cheng family – The New World Development group of companies includes NWS Holdings, New World China Land and Mongolia Energy Corporation. They are controlled by Cheng Yu-tung, also from Guangdong province. The companies are involved in property, infrastructure, public services (bus and ferry services) and telecom. New World Development has a market capitalization of HK$59 billion (as of July 26).

Cheng has taken a back seat since 1989. His elder son, Henry, educated in Canada, is the managing director of New World Development and chairman of New World China Land and NWS Holdings; younger son Peter is executive director of these two. Crucially, New World China Land owns a vast land bank in – where else – mainland China.

Cheng used to be known as the “King of Jewelry” since the 1960s, when he was controlling no less than 30% of all Hong Kong diamond imports. He’s always been associated with the very popular Chow Tai Fook jewelry company – until he entered the property market in the late 1960s. Some of Hong Kong’s top landmarks were built by New World, such as the Regent Hotel (now Intercontinental) and the Hong Kong Exhibition and Convention Center, where the 1997 handover took place.

Y K Pao and Peter Woo – The Wharf/Wheelock Group was founded by Y K Pao – a shipping magnate born in Zhejiang province who started his career as a banker in Shanghai and moved to Hong Kong in 1949. He died in 1991. Since 1986, the chairman of both Wharf and Wheelock is Peter Woo, Pao’s son-in-law, born in Shanghai and married to Pao’s second daughter, Betty.

Wharf (Holdings), Wheelock and Company and i-Cable Communications have a market capitalization of HK$190 billion. They are involved in property investment, telecom, media, entertainment and container terminals.

By 1973, before the oil shock, Pao had more ships than legendary Aristoteles Onassis. When he diversified from the shipping industry and took over Wharf in 1980, with great help from HSBC, he landed some of the most valuable properties in the tourist Mecca of Tsim Sha Tsui, in Kowloon; nowadays they are occupied by Ocean City, Ocean Centre, Harbour City, the Marco Polo hotel and The Getaway. Wharf is arguably Hong Kong’s king of commercial landlords.

Pao also got control of the famous Star Ferry – the most spectacular short cruise in the world, for only HK$2.30 one-way across the harbor – as well as the Island tram franchise and a lot of container terminals. The companies also own Time Square, two office towers-cum-megamalls in Causeway Bay, as well as the upscale department store Lane Crawford.

Woo tried to go straight to the point and become Hong Kong’s first chief executive in 1997. But he lost to Tung Chee-hwa, who got 320 out of 400 votes.

The Kadoorie family – Elly Kadoorie founded the CLP group in 1901. He’s the late grandfather of the current chairman Michael Kadoorie. The family is the largest shareholder of CLP Holdings and the Hong Kong and Shanghai Hotels group – who own the luxury Peninsula chain. These two companies have a market capitalization of HK$172 billion (as of July 26). The CLP group is essentially a local electricity monopoly that then diversified to own power stations in Beijing, Tianjin and Heibei and an energy corporation in Gujarat, western India; 92% of another one in Victoria, Australia; and 50% of another one in Thailand.

They got into telecom connecting Hong Kong to China with a fiber optic cable. They also got into property – following the trail of Li Ka-shing and the Kwoks. They could only make it into this cartel because they had lots of capital and lots of cheap land in the form of power stations (some of them no longer in use); most of all, they were savvy enough to get into a joint venture with Cheung Kong Holdings.

Competition or bust
This short presentation may offer a measure of how a few monopolies and oligopolies control most of the daily life of an average Hongkonger. It suggests Hong Kong, rather than being a “free” society, is actually the domain of captive markets.

By any definition, a captive market is a market where very few actors exercise a monopoly. Captive markets – which imply scarce competition – yield immense profits, without relation to costs of production.

A way out for Hong Kong would be, of course, more competition. For two years now, the Hong Kong government has introduced a Competition Bill to the Legislative Council (Legco) – after a discussion that started in 2006. The bill went through quite a few amendments. This is more or less what it will look like. [1]

But is it what Hongkongers really want – and need?

Ronny Tong of the Civic Party, a barrister and vice-chairman of the Competition Bill panel of Legco, has been pushing for an anti-monopoly law in Hong Kong for years. The law was finally passed in mid-July, a few days before the current term of the council terminated. “After the bill is passed, if there is any evidence of price-rigging by the two major supermarket chains, the complaints will be forwarded to the competition affairs committee for investigation,” Mr Tong said in a phone interview with Asia Times Online.

He expects the law will facilitate a “competition culture” in Hong Kong. Other legislators, however, are not so optimistic.

Albert Chan, legislative councilor (People Power), called the bill “toothless”. When asked why he cast an abstain vote during the legislation of the bill, Chan explained to Asia Times Online, “The scope of exemption of the bill is too large to be effective. First of all, the government or statutory bodies are granted full exemption of the law. More seriously, there is no legal limitation of market share to prohibit monopolistic control of the market. On the other hand, it will be very hard to collect evidence of price-rigging between oligarchic coalitions, which frequently happens in Hong Kong now.”

Chan stressed the most serious monopolistic control and oligarchic coalitions can be found in sectors such as the property market, petroleum and the telecom businesses. The current competition law, he insists, is unable to deal with these problems effectively.

It may be ironic that Hong Kong, long hailed as the “freest economy” in the world, has waited for such a long time to get the law passed; and even when it is passed, it is much less effective than expected. Perhaps the answer to this question may not be found in the economic, but rather the political structure of Hong Kong itself.

NEXT: The Hong Kong model applied to China

Note:
1. The Hong Kong Competition Bill, Norton Rose, March 2012.

Eddie Leung is Managing Editor of the Chinese edition of Asia Times Online. Pepe Escobar is the author of Globalistan: How the Globalized World is Dissolving into Liquid War (Nimble Books, 2007) and Red Zone Blues: a snapshot of Baghdad during the surge. His most recent book is Obama does Globalistan (Nimble Books, 2009). He may be reached at pepeasia@yahoo.com

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Posted in: Corruption, Politics