• Sun
  • Dec 21, 2014
  • Updated: 1:18am
PUBLISHED : Sunday, 04 November, 2012, 12:00am
UPDATED : Sunday, 04 November, 2012, 3:36am

Hong Kong will pay the price for Leung's discriminatory property tax

Philip Bowring says C.Y. Leung should not have so easily torn up a basic tenet of our tax system and free market principles just to boost his low popularity ratings


Philip Bowring has been based in Asia for 39 years writing on regional financial and political issues. He has been a columnist for the South China Morning Post since the mid-1990s and for the International Herald Tribune from 1992 to 2011. He also contributes regularly to the Wall Street Journal, www.asiasentinel.com, a website of which he is a founder, and elsewhere. Prior to 1992 he was with the weekly Far Eastern Economic Review, latterly as editor.

The new administration is showing two worrying signs. One is government by knee-jerk response to problems, driven, it seems, by a desire for popularity. It suggests that while Leung Chun-ying is aware of issues which need to be tackled, there is little depth to his thinking. The other is a tendency for government by diktat. This suits both arrogant bureaucrats and the authoritarian instincts of the Communist Party but has little place in today's Hong Kong.

The most glaring recent example of both tendencies at work is the imposition of special taxes on purchases of residential property by non-permanent residents. As an expert on the property market, Leung let his desire to be seen to be doing something about rising residential prices, and thereby boost his popularity, get the better of what he must surely recognise as doing long-term damage to the whole property market, and to Hong Kong's reputation for open markets.

Much of the blame surely lies with his reappointment of John Tsang Chun-wah as financial secretary despite a performance that shows him to have been the worst holder of the post in the 40 years I have been commenting on fiscal policy. Despite five years in the job, Tsang still seems clueless about taxation principles or devising strategies for the medium term. After years of producing ragbags of budget handouts and fiscal fiddling, he has now put his name to the stupidest fiscal measure in living memory.

A discriminatory tax on non-permanent residents is contrary to the most basic tenet of Hong Kong's tax system. It might well be in breach of Article 105 of the Basic Law.

The extra stamp duty on the resale of residential properties is also an unwarranted effort to manipulate the market. Will officials next try a similar stunt with stocks?

The greatest irony of all is that a government preaching integration with the mainland has now adopted a measure aimed primarily at keeping out mainland money. At the same time, it has told mainlanders that Hong Kong is not the free market haven they have long admired but a place where third-rate officials and dumb politicians undermine decades of basic principles.

It is not as though Hong Kong is facing a crisis such as might have justified the stock market intervention in 1998; there is no crisis here. Yes, prices have gone up, but big mainland money is more interested in luxury apartments than the lower and middle levels of mass market private-sector housing. Why should we care if non-permanent residents want to buy at any price? Imposing arbitrary taxes may keep them out but it deprives local owners of the opportunity to sell. Meanwhile, at the lowest end of the market, small flats in the northern New Territories are hardly any more expensive now than in 1998.

There is no good banking stability reason for this tax. The non-residents mostly come with cash. The Monetary Authority has other means at its disposal, if it sees fit, to keep down the rate of growth of mortgage lending.

Tsang cannot see that any such arbitrary taxes simply create a succession of new problems requiring yet more diktats. Thus, originally, the measures were aimed only at individuals. But, to prevent avoidance, they have had to be applied to companies, thereby creating more distortions in the market. And not just in the residential market.

Money is fungible. It has to find a home somewhere so if it cannot go into apartments, why not buy an office, a shop or a car park? Is Tsang next going to try to impose extra imposts on foreign purchases of these? Surely high office prices drive away business and must be brought down.

Non-resident buyers do have an impact at the margin, but they still represented only 6.5 per cent of residential transactions last year and probably no more than 10 per cent before the new taxes.

The main reason for rising prices is simply low interest rates and an undervalued currency. But those can only be dealt with by changing the US dollar peg. The long-term problems of housing supply and prices, which mainly affect lower-income and young families, are twofold: the previous administration's policy of starving land supply to keep prices up; and its lack of concern for public housing which will remain crucial for a third of the people, at least while income differentials remain so extreme.

For sure, the government needs time for commendable new policies on land supply and public housing to have an impact on supply. But that is no reason to throw out basic principles of taxation to try to gain short-term popularity.

That other countries, such as authoritarian Singapore, have restrictions on non-residents is beside the point. Hong Kong has never had them, so if that basic principle is to be changed, it should only be done after careful deliberation and consideration of all the consequences. We have had neither of those.

Expectations of Tsang were always low and Chief Secretary Carrie Lam Cheng Yuet-ngor has never shown an interest in fiscal and market matters. But for property expert Leung to fall for this dangerous nonsense is very worrying. It suggests an excessive desire for easy popularity, combined with the Beijing view that principles and laws should be no bar to executive action, however misguided.

Philip Bowring is a Hong Kong-based journalist and commentator


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This article is now closed to comments

Rich places for the rich and poor places for the poor.
We would not want to see poor majority to live in the Peak / Repluse bay.
Hong Kong is a rich financial centre for the rich minority while China is the more appropriate place for the poor majority of HK people
Rising property prices are a function of supply and demand.
The reports from real estate agencies of lower transactions, developers rebate and less interest by mainlands in our residential properties show that the Govenment policy is working.
If only the Government could tackle the high vacancies of residential properties as well.
A property bubble does no one any good and speculation in residential property is akin to speculating on food commodities, there are always arguments for this but there are more altruistic ways to profit.
Buying a flat in Hong Kong that will only be used a few days out of the year doesn't make allot of sense. Only speculators can justify such transactions to themselves. But I doubt if a stamp tax is going to deter them if they are determined to own property in Hong Kong, for whatever reason. It looks like C.Y. is doing something when all that he has done is stir up controversy and damage HK's image. I agree that the dollar peg has outlived its usefulness. Financial policy in Hong Kong shouldn't be decided in Washington.
I agree with your analysis.
what on earth are you on about?
at least four or five other measures were taken WELL BEFORE the non-local tax was implemented
oh, and by the way, NONE OF THEM WORKED
so do not act like this is the first step taken to address this very real problem, and it might not be the last
As one of those non-permanent residents, I fully support the new tax.
Whenever the government intervenes to improve the lives of the population, free-market fundamentalists prophesize the downfall of Hong Kong due to undermining of our "reputation for open markets". This is utter nonsense.
Businesses don't care about our reputation -- they care about concrete polices that affect their operations. Does anyone really believe that firms considering investment in Hong Kong care whether or not non-residents can buy property in the city? Unlikely, except for property agencies and the like. Even firms employing large numbers of expatriate staff are not going to have this anywhere in their list of top hundred concerns.
The really comical thing about the free market fundamentalists' complaining about BSD is that we already have a dysfunctional land system that is among the world's most socialized and heavily government-managed. Instead of complaining about a short term measure intended to tame spiraling housing costs that result largely from incompetent micro-management of land use, why not try to change this broken system?
Trying to please the populace and boost one's popularity rating is common everywhere and is a basic instinct among political leaders. Even emperors did that in feudal times. Is Leung's new property measure short-sighted without doubt? Too complicated for a simple answer. Even if he were wrong, give him a chance to try.
CY's decision to keep John Tsang is an unmitigated disaster and shows that CY's promise of change was nothing more than a hollow promise.
What purpose does the extra taxing on mainlanders’ buying serve? It wouldn’t stop all who still for some reason to choose to snatch up property in Hong Kong. The property market still would continue cater to rich mainlanders at the expanse of affordable housing for the locals in a limited available land. It is a shallow idea that anchors on catering to the prosperity to the local developers and Hong Kong Government. Perhaps it is what all is about.


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