An open alliance of property addicts

South China Morning Post  |  Feb 17, 2005

By Sin-ming Shaw

The Hong Kong public is upset at the alleged collusion between the government and big business. The jury is still out on the issue, but there is definitely something going on. That "something" is much less secretive than conventional wisdom would suggest. It involves institutionalised relationships between government and the biggest property companies. This relationship is not clandestine, but open, and it pre-dates the current administration.

At the centre of the bond is the addiction to land revenue, with the property tycoons as the principal suppliers. Almost the entire population is also addicted to the idea that trading in property is a life-long profitable habit.

Last year, land income was 2.6 per cent of total operating revenue. It was low because the government stopped selling land, to support property prices. Historically, the share has been much higher, reaching 25 per cent in the 1997-98 financial year. As the economy recovers, land's prominence in the budget will rise again.

Many believe that land-related income is understated in the budget because it excludes profits tax on property companies and stamp duty on property shares trading.

A double-digit share in the budget has political significance because less than half a dozen developers typically account for most of that revenue. Among them, three dominate: Cheung Kong, Sun Hung Kai Properties and the Henderson Group.

The developers rely on the government's co-operation to ration its sales, thus ensuring prices rise over time, notwithstanding short-term volatility. Protesters against "collusion" sometimes forget that these tycoons are major underwriters of public finance. Put another way, they are an arm of the Inland Revenue which collects from the tycoons who, in turn, collect, via a finished product at monopolistic profit margins, from the end-users. Naturally, the government is tolerant of this exclusive club because it is a dependable tax collector. The administration is understandably against enacting anti-competition laws, as they would impinge on tycoons' interests that have extended beyond property. Higher revenue also allows senior officials to pay themselves salaries several times higher than those of their counterparts elsewhere. Joseph Yam Chi-kwong, head of the Monetary Authority, who controls neither money supply nor interest rates, is the world's highest paid "central banker".

The top developers sit on huge inventories of land that could supply at least six years of total private housing needs. Hong Kong property tycoons are the world's biggest land speculators. Sun Hung Kai, Cheung Kong and Henderson are the world's three largest property companies. Their financial success depends critically on a co-operative government which values this co-dependent bond that has served both parties well.

Former governor Chris Patten learned the hard way by fiddling with that relationship. In 1994, when he wanted to curb runaway property prices, he broke with tradition by not consulting the tycoons before launching his measures.

At a historic auction in May of that year, the 12 largest property companies formed a united front to hugely underbid for two multibillion-dollar residential property sites. No other developer tried to outbid it. In fact, no one else could afford to.

The government was shocked. Unlike the climax to the classic western High Noon, this time the sheriff was gunned down by the bad guys. Never again did Mr Patten try to upset the financial relationship. This has remained intact, until Chief Executive Tung Chee-hwa began to show apparent favouritism to one family - riling the other tycoons. Will there be a price for Mr Tung to pay?

Sin-ming Shaw is a visiting scholar at Columbia University. This is the first of a five-part weekly series on Hong Kong's economy and leadership

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