Hong Kong stamp duty

Government must back off to keep Hong Kong a truly free market

Lam Pun-Lee esays Hong Kong's standing as a free market is being undermined by its own government, with its intrusive restrictions on property and other sectors that hurt growth

PUBLISHED : Tuesday, 04 February, 2014, 11:14am
UPDATED : Wednesday, 05 February, 2014, 4:13am

Hong Kong's economy has always been a global stand-out, rated the world's freest for 20 consecutive years in a ranking compiled by the US-based Heritage Foundation and The Wall Street Journal. However, with a drop in the score for corruption and increasing government control over land policies as well as factors limiting the flow of information, the gap to the others - notably Singapore - has narrowed further.

This trend is worrisome.

A case in point is the property market. In the decade following the 1997 handover, Hong Kong's property market experienced unprecedented volatility due to some obvious political factors in a government-policy-driven market.

Hong Kong is a densely populated city, where land supply is controlled by the government. Land supply influences the supply of housing and property prices, which means that the real estate market cannot be considered a truly free market. Furthermore, the Monetary Authority can exercise influence over bank mortgage policies, significantly affecting transaction volumes and pricing.

After the handover, housing measures implemented by then chief executive Tung Chee-hwa failed to resolve the effects of the Asian financial crisis. Tung's pledge to provide 85,000 flats each year caused the market to crash. His subsequent bailout in 2002 through a restriction on land and property supply then drove prices up; since 2003, they have more than tripled.

After Donald Tsang Yam-kuen took over in 2005, no land reserves were established. This left the government with insufficient land to meet market demand, causing prices to climb further since 2009.

Given the short-term housing supply shortage, the government could only rely on demand management measures and the tightening of mortgage rules to suppress demand. While initial policies were aimed at reducing speculation and the sale of luxury housing, the tightening of mortgage rules and increased stamp duty on luxury premises prompted speculators to divert their investments to small and medium-sized homes, as well as commercial buildings.

As a result, the prices of these properties soared, hindering the ability of average buyers to get into the market and limiting the ability of small and medium-sized enterprises to buy their own premises. In response, the government extended these measures to include all properties, with the maximum loan for a HK$7 million residential property also lowered to 60 per cent of its value, ultimately causing the market to stagnate.

With the introduction of the individual visit scheme in 2003, we have seen a surge in mainland visitors. They came to Hong Kong to shop, buy flats and give birth - in turn promoting economic development and creating employment opportunities.

However, failures in government land planning have resulted in a severe shortage of retail and residential land supply, and a substantial rise in rents has increased both living and business costs. There have been complaints about a shortage of housing, hospital beds and milk formula, as well as other daily necessities.

In response, Chief Executive Leung Chun-ying levied a buyer's stamp duty on non-permanent residents. He also imposed restrictions on milk formula purchases, and put a stop to mainland women giving birth here.

Such policies have quelled local discontentment in the short term, but have hurt Hong Kong's reputation for a free business environment. As long as investors abide by laws, including those governing product and service safety regulations, and with the competition laws that will be in place soon, the government should not interfere through administrative means that stifle market development.

The administration has ramped up efforts to regulate housing, free television, education, medical and health care (including the beauty business), and other industries; there have even been selective regulatory measures in the highly competitive retail industry (including limits on milk powder and levies on bottled drinks). Such extensive government interference in the market is worrisome.

For example, besides being hit by the two-can limit, infant formula products may yet be the victim of further government tightening. It has now been more than a year since the administration introduced the "Hong Kong Code of Marketing and Quality of Formula Milk and Related Products, and Food Products for Infants & Young Children".

This code intends to ban the advertising of milk powder for infants under the age of three, and to restrict the use of trademarks and the manufacturers' ability to provide product information to mothers and carry out activities promoting formula milk. By comprehensively banning such advertising, are we meant to believe that milk powder is harmful to babies and, as such, warrants measures equivalent to those imposed on the marketing of cigarettes?

The government has been using licensing, taxation, subsidies, quotas and bans on advertising and promotional activities in a blatant attempt to limit competition. Not only have these efforts failed to serve the public good, they encourage anti-competitive rent-seeking activities, and prompt the business community to waste resources on fighting for preferential policies. In the end, all of these have a negative impact on Hong Kong's competitiveness and long-term economic development.

Lam Pun-Lee is an economist and former associate professor in the School of Accounting and Finance at Hong Kong Polytechnic University