Thursday, October 1, 2015

HKU Symposium Speech

Three years ago I was invited by HKU's Politics and Public Administration Association to take part in a symposium on the subject of land monopoly in Hong Kong. I'm re-posting below the blogpost containing my opening speech that appeared on Asia Sentinel's site on November 22, 2012.

On November 14, 2012, I was honored to participate in a HKU symposium on the topic of land monopoly in Hong Kong. The symposium was organized by the Politics and Public Administration Association of the University of Hong Kong. My opening speech was delivered in Cantonese to an audience consisting mostly of HKU students. To my pleasant surprise, the discussion that followed was highly animated, and from the questions asked, I was heartened to find that these young people have a genuine interest in redressing the injustices that are happening around them.

Here is a translated excerpt of my speech:-

"I would like to focus our discussion today on the relationship between Hong Kong's high land price policy and the tax system.

First please allow me to share my own thoughts and opinions on the subject. Afterwards, the floor will be open for group discussion.

In the July 5, 2010 issue of the Hong Kong Economic Times, it was reported that Hong Kong's five leading developers together own a total land bank of 1,279 hectares of land, which is three times the land owned by the government. It was also pointed out that four leading developers together own 1,000 hectares of agricultural land, which is equivalent to one-fifth of all agricultural land in Hong Kong.

Why are developers so 'addicted' to land? In my view, other than the mentality of regarding something that's scarce as highly worthy of loading up on, another vital catalyst that incites land addiction would seem to be the high land price policy that past and present governments have long been championing.

Let's take a look at the history of this high land price policy.

The policy is not one that's created by the SAR governments. Rather, it was first introduced shortly after the first colonial government was established upon the signing of the Nanking Treaty. The first Hong Kong governor, Sir Henry Pottinger, designated the colony as a free trading port. Being a former British trade minister, he was naturally partial to British trade interest groups and favored free trade policies that ensured their success. But this meant that import duties would have to be eliminated. At the same time, the colonial government, being keen on garnering political support from British traders in Hong Kong, was deliberately aiming to keep corporate profits tax at a relatively low level. Given Hong Kong was then still very much an economic backwater, the meager amount of profits tax was hardly sufficient to sustain the operation of the colonial government. The waiving of import duties was no help either. Moreover, the British government then was too financially strapped to be able to look after Sir Pottinger's government. The first governor therefore had little alternative but to turn to the only remaining and logical source of income - Hong Kong's land.

Auctioning off land lease rights to the bidder offering the highest amount of annual rent was seen as a way out of his government's financial blues. From then on, successive colonial governments have regarded land auctions and tenders as a cost-efficient and highly effective way of collecting much-needed tax revenue.

By the 50s and 60s, the incessant influx of refugees from Mainland China and the resultant demand for land and housing created a perfect opportunity for several Hong Kong Chinese developers to gorge on agricultural land in the New Territories as well as on Letter Bs. By this time, those shrewd developers had already gained a good insight into the weakness of the high land price policy, that is, that government itself has a vested interest in keeping land prices high for the sake of its own coffers. In other words, they realized that whenever the property market took a dip, government would at once respond by holding back land sales, thus providing a cushion to the market. This meant that the market would easily rebound after a short dip. Hence land hoarding was quite riskless.

On the signing of the Sino-British Joint Declaration in 1984, the psychological effect alone of the announcement of the annual land sale cap of 50 hectares was enough to give rise to a frenzied speculative mood in the flipping of agricultural land, Letter Bs and properties alike.

In the past few decades, under the operation of the high land price policy, we have witnessed the following phenomena.

Against a backdrop of constant keen demand for residential and commercial land in the 70s and 80s, the few developer conglomerates who had earlier been on a land gorging spree (including utility assets) were able to profit exponentially, with their tycoons acquiring world fame in wealth. The effect of their land hoarding is like the situation where bakeries have monopolized the supply of wheat flour and are thus able to manipulate the price of their baked goods. It is especially significant that they hoarded up agricultural land and Letter Bs, as the private hoarding of these has helped to distort the market critically.

While the high land price policy has helped to create a few economic Goliaths, on the other hand, it has caused immense pain to society as a whole.

On the economic level, since a preponderant portion of society's resources and energy have been channeled to the real estate market, Hong Kong's economy base has been narrowing further and further over the past decades, with many previously vibrant industries dying out, leading to a dwindling of job species. In respect of housing, Hong Kong is one of the world's most expensive places to live, while Hong Kongers have had to put up with ever declining quality of accommodation.

The already dire situation has taken a turn for the worse in the past ten years. The inflow of Mainland capital has been an added impetus in driving an already exuberant property market into uncharted territory. The drastic cut in the supply of residential land and subsidized housing under the Tsang administration has skewed further the overall housing demand/supply imbalance. Many from the low-income group have been forced to live in unsafe sub-divided flats while a lot of middle-class professionals find home-ownership a distant dream. Retail shop rents have recorded explosive growth, with rent increases easily doubling and trebling within short periods of time. Many of our favorite small restaurants and shops have met with their unwarranted demise. Consumer good prices have rocketed along with crazy rent increases. Those who own properties are becoming ever richer, while those who don't are in danger of being decimated.

At present, almost half of government's annual budget income comes from land sales and lease modification and other land- or property-related taxes. Thus, from government's standpoint, keeping the high land price policy intact is not only rational, but downright desirable. But given the daily exacerbation of a plethora of social and economic problems that have arisen directly or indirectly from the policy, is it not time for society to ask a serious question: is the policy one that truly serves the common good?

While on this train of thought, I would like to point out one peculiarity in the handling of the land-related tax revenue, and that is, all land sale income is automatically transferred into a "Capital Works Reserve Fund" each year (this practice dates back to 1982), and this Fund is designated for the exclusive use in infrastructure-related projects. In my view, such a practice not only prevents this vast amount of tax (which is a form of heavy  hidden tax shouldered by all home-owners) from being used flexibly in areas like education, medical services and social welfare, but it actually serves to augment land values further, thus benefiting mostly those land-rich conglomerates. This in fact results in an endless vicious cycle.

One crucial question we need to ask is: does government really have no choice but to rely so heavily on land sale income for its fiscal health?

In my book I did suggest that the feasibility of many types of new taxes can be looked into. These include capital gains tax, wealth tax, dividend tax, a more highly progressive salary tax, and even the reinstatement of the estate duty. The basic underlying concept is that those who are more financially capable should bear a bigger tax burden. Hong Kong is already a very wealthy society and the critical issue is not about the creation of more wealth, but about fairer wealth distribution (不患寡而患不均). These types of taxes can address that problem squarely and are the only way to narrowing the yawning wealth gap.

But any meaningful reform to the tax system aiming to curb government's reliance on land revenue will hurt the deeply entrenched property cartel most, and these vested interests also happen to wield huge political power. It goes without saying that suggestions for reform will only meet with stiff opposition. Still, we should remember and take courage in what Mark Twain once said: "Reflection is the beginning of reform." If only we are willing to ask questions and give our thoughts to prevailing problems, we have already taken the crucial first step.”

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