It’s the Budget, Stupid!

South China Morning Post  |  Feb 17, 2005

By Sin-ming Shaw

The Hong Kong public is upset at “collusion” between the government and big business.  
Collusion means secret agreements between officials and private individuals for deceitful or illegal activities.  The jury is still out on this issue. However, there is definitely something going on.
That “something” is much less secretive than conventional wisdom would suggest.   It involves institutionalized relationships between government and the biggest property companies, not with all tycoons or all developers.   This relationship is not clandestine, but open and it pre-dates the current administration.  
At the center of the bond is the budget’s addiction for land revenue with the property tycoons as its principal suppliers.
Almost the entire population is, too, addicted to the idea that trading in properties is a life-long profitable habit.
Last year the share of land income in total operating revenue of the fiscal budget was 2.6%.  It was low because the government stopped selling land to support property prices.  The share was historically much higher reaching 25% in fiscal year 1997/98.   As the economy recovers, land’s prominence in the budget will rise again.   
Many believe land-related incomes in the budget are understated because they exclude profits tax on property companies and stamp duty on trading of property shares on the stock exchange. 
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 3 companies dominate: Cheung Kong, Sun Hung Kai Properties and the Henderson Group.  Many believe Cheung Kong’s chairman is first among equals.
The developers rely on the government’s cooperation to ration its sales to ensure prices would rise over time notwithstanding short-term volatility.
Protestors against “collusion” sometimes forget that these tycoons are major underwriters of public finance.   Put it differently, they are an arm of the Inland Revenue which first collects from the tycoons who in turn collect, via a finished product, at monopolistic profit margins from the individual end-users.  The margins average 50%, sometimes over 100%, besting knowledge-based monopolies such as Microsoft.
Naturally the government is tolerant of this exclusive club   since it is a dependable tax collector.  This government is understandably against enacting anti-competition laws for they would impinge on the top tycoons’ interests that have extended beyond property.
Higher government revenue also allows the senior officials to pay themselves fabulous salaries several times more than their counterparts anywhere on this planet.   
Joseph Yam, the Head of the Monetary Authority, who is not even a central banker for he controls never money supply nor interest rates, is the highest paid “central banker” in the world. 
Like the now disgraced former chairman of the New York Stock Exchange, Richard Grasso, his compensation was determined by a committee with many members whose business the Monetary Authority regulates.
The top developers sit on huge inventories of land accumulated over the years that could supply at least 6 to 7 years of total private housing needs.  Hong Kong property tycoons are the world’s largest land speculators.  Sun Hung Kai, Cheung Kong and Henderson are the world’s three largest property companies.   Their financial success depends critically on a cooperative government who values this co-dependent bond that has served both parties well over many years. 
Former governor, Chris Patten, learned the hard way by fiddling with that relationship.
In 1994 when Chris Patten wanted to curb runaway property prices, he broke tradition by purposely not running past the tycoons for advice and consent before he launched his measures.  
At a historic auction in May of 1994 twelve largest property companies formed a united front to grossly underbid two multi-billion dollar residential properties.  No developer outside the united front raised a hand to outbid the cartel.  In fact, no one else could afford to bid for multi-billion land except the cartel.
The government was shocked by the showdown.  Unlike the climax at the classic cowboy movie, High Noon, the Sheriff this time was gunned down by the bad guys.
Never again did the Patten administration dare to upset that financial relationship which remains intact to this day until the current Chief Executive began to show apparent favoritism on one single family at the cost of riling all the other tycoons. 
Sin-ming Shaw is a visiting scholar at Columbia University, New York.

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