Model Economy's Quest to Spread Its Riches
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Inside Justine Lau on a growing interest in the arts. Doing Business in This Qianlong period vase was sold last month at auction by Sotheby’s for $32.4m HONG KONG Page 3 FINANCIAL TIMES SPECIAL REPORT | Tuesday November 16 2010 www.ft.com/hongkong2010 | twitter.com/ftreports Model economy’s quest to spread its riches Tom Mitchell finds there is another side to the world’s most open market and its enormous capacity for wealth generation ong Kong government offi- cials covet the territory’s status as “the world’s fre- est economy”, an honour Hbestowed on it for 16 years running by the conservative, Washington-based Heritage Foundation. That designation tells only half the story. Hong Kong’s admirers like the fact the former British colony and free port, which reverted to Chinese sover- eignty as a “special administrative region” in 1997, taxes very rich people at very low rates. Tax rates on sala- ries and company profits are set in the mid-teens, with capital gains and inheritances exempt entirely. Hong Kong’s capital-friendly regime is just the tip of a much larger and more complicated social compact that, from another perspective, belies its reputation as a model free economy. The territory is much poorer than its impressive per capita GDP figure, $42,800 last year, implies. Half of all workers earn less than HK$9,750 per month – an amount equivalent to, in US dollar terms, just $15,000 per annum. In 2009 the average annual wage of Hong Kong’s 550,000 cleaners, who account for 15 per cent of the workforce, was a mere $7,960. As Leung Chun-ying, a member of the pro-Beijing establishment and a potential future Hong Kong chief executive, put it in a presentation to the Oxford & Cambridge Society ear- Tale of two territories: beneath the spectacular Hong Kong skyline lies a huge gulf between rich and poor, which the government is now beginning to tackle with the introduction of a minimum wage Getty lier this year: “The trickle-down effect has not happened.” their land purchases and home sales tors effectively cornered by a handful the brand.” The company also opened and I’ve never seen that,” says Mr wound down but a research and devel- For overseas professionals, this for maximum profitability, contribut- of tycoons in their late 70s and early what Mr Galli describes as the world’s Galli. “[Product development] is so opment centre opened. “The business combination of low taxes and cheap ing to market volatility.” 80s, the profits their empires rake in “most modern power-tool plant” in fast you can’t believe it. It reminds me was losing $75m a year so the choice labour (for everything from taxi rides The vast profits these companies are self-perpetuating and will soon be Dongguan, a manufacturing centre of the high-tech industry.” was no jobs,” Mr Galli says. “Now to domestic help) make Hong Kong a have reaped from their commercial passed to a new generation. “The old north of Shenzhen, and reduced its The Hoover acquisition saddled TTI Hoover is growing so fast we are add- kind of expat heaven. But the gulf and residential property investments man is in good health, but at his age product-development cycles from 10 with an unproductive operation in ing more [engineering R&D] jobs.” between rich and poor has become an have in turn been the basis for their anything can happen,” says a heir to months to eight, compared with an Ohio. After negotiations with the fac- As a result, he adds: “We have 24/7 embarrassment and a political liabil- dominance of other areas of the econ- one of the region’s great fortunes. The industry standard of one-two years. “I tory’s “enormous union” and the R&D. Right now America is asleep but ity for the government. To the dismay omy, most notably ports, retailing and pampered sons and daughters of Hong was at Black & Decker for 19 years state’s governor, the facility was China is working.” of free-market purists, last week the telecommunications. Kong’s richest men, however, will territory introduced its first minimum Hong Kong’s retail market is such a struggle to take the family business in wage, set at HK$28 ($3.55) an hour. stitch-up that not even as ruthless innovative directions. To help people survive on such low and efficient a competitor as Walmart Hong Kong Inc is at its competitive wages, the government has for dec- has been able to get a look-in. And even and innovative best away from its ades provided public housing to half if suspicions of collusion between the cosy home market. An increasing the population, making it by far Hong territory’s largest companies to number of the territory’s largest for- Kong’s biggest landlord. The govern- exclude outside competitors could be tunes are being made in southern ment-owned MTR Corp also runs what proved, such behaviour would not be China, especially in Guangdong prov- is arguably the world’s best under- illegal in the absence of a competition ince’s Pearl river delta region. The ground and light-rail network, subsi- law. But as with the plight of the territory’s entrepreneurs have thrived dised by property development rights working poor, this too has become an in a hypercompetitive environment the company is granted at the stations embarrassment. The government is characterised by tight margins and along its various lines. currently drafting a competition law. punishing product development This is just the start of the Hong With so many rent-generating sec- cycles. The scale of the Pearl river Kong government’s direct involve- delta’s export sector is difficult to cap- ment in even surprisingly trivial ture, although one comparison quoted areas of the economy. While the Chi- by Michael Enright, a regional devel- nese communist party made a con- opment expert, is particularly telling. scious decision to retain control of the Shenzhen, a city of 10m people and a commanding heights of China’s econ- magnet for Hong Kong investment, omy – state-owned companies monop- exports almost as much as India olise heavy industry, telecommunica- ($162bn in 2009 vs $177bn) and boasts tions and other strategic sectors – the an economy that is one-third bigger territory’s supposedly laissez-faire than Vietnam’s (pop 90m). government has a majority stake in Techtronic Industries is an example Hong Kong Disneyland and, through Inside this issue of a Hong Kong-based manufacturing its Trade Development Council, domi- Appetite for change Enid Tsui juggernaut. Headed by German and nates the market for trade fairs and talks to Margaret Leung, chief Hong Kong entrepreneurs, TTI was exhibitions. executive of Hang Seng Bank, about established in 1985 as a contract man- Elsewhere in the world’s freest the territory’s ability to adapt Page 2 ufacturer with factories in the Pearl economy, de facto cartels operate. One river delta. Contract manufacturing, unintended consequence of the Hong Upwardly mobile Christopher however, can lead a company on a Kong government’s reliance on tightly Dillon finds that the property market downward spiral; manufacturers’ mar- controlled and lucrative land sales for is enjoying a boom period – but it is gins are under constant pressure and revenue – rather than salary, profit not good for everyone Page 3 most of a product’s value flows to its and capital gains tax – has been the brand owner. So TTI began acquiring Hive of industry Michael Enright emergence of a half-dozen property some of the world famous power-tool focuses on the Pearl river delta companies that can compete at auc- region, which is continuing to grow and floor-care clients it used to sup- tions for the territory’s most precious at a phenomenal rate Page 4 ply, such as Milwaukee Tools, Ryobi, commodity. Homelite and Hoover. “Government land policies and high Good neighbours Robin Kwong “We bought [Hoover] for a small prices have concentrated power in the analyses erstwhile frosty relations price because it was losing money, hands of a few large developers,” says with Taiwan, which are finally but we knew it was the best cleaning Christopher Dillon, a Hong Kong showing signs of thawing Page 4 brand in the world,” says Joseph property investor who has written a Galli, TTI chief executive. “The true book about the market. “They time profitability falls to those who supply Currency faces a future of fears and uncertainty asked with increasing regu- tricky position. Eddie Yue, Dollar peg larity. Few would dispute deputy chief executive, that the peg introduced 27 notes that loose monetary Ben McLannahan years ago has served Hong policy in the US “could on a relationship Kong well, helping it to increase the risk of a prop- Talking point: HK’s dollar withstand a series of erty price bubble in Hong with the greenback, shocks. But there is a grow- Kong”. factors of any property mar- and what happens ing sense that the misalign- But the HKMA cannot ket, which are interest rates ment of the Hong Kong and fully engage in exploring and liquidity,” notes Joseph when it ends US economies can no longer the alternatives, for fear of Tsang, head of capital mar- be reconciled. inviting speculative attacks. kets at Jones Lang LaSalle, In the debate over the Thanks to ultra-low inter- Discussions tend to end the real estate services future of Hong Kong’s cur- est rates, and a determina- with familiar conclusions. firm. rency, two arguments tend tion by the US Federal “Given the small and exter- The HKMA’s tightening to go unchallenged.