March 8, 2018

William Pesek

Territory must defend economic freedom and fight inequality

Hong Kong’s pro-democracy activist Joshua Wong sent Xi Jinping’s censors scrambling last week with a two-word tweet. The offending Twitter post carried a photo of a fanged, menacing-looking Winnie the Pooh and the caption “Emperor Xi.”

Few references troll Xi’s expurgators into action as fast as comparing China’s strongest leader since Mao Zedong to the portly cartoon bear. Memes likening Xi to the honey-loving Pooh were banned in 2013. Yet Wong’s provocation has a far bigger purpose than most. It points to a future that may be anything but cuddly or sweet for Hong Kong’s 7.4 million people.

The same week the Communist Party made Xi president for life, Hong Kong produced a budget suggesting it learned nothing from the 2014 “Umbrella Revolution” that Wong helped lead. It was big on political honey — some modest tax breaks and handouts — but light on initiatives to reduce the inequality fraying the economy. The budget failed to address a reliance on overpriced land, preferences for the interests of tycoons towering over the place or the need to increase innovation and productivity.

It also set the stage for an intensifying showdown between Xi’s China and Hong Kong’s future.

The confrontation is not with Hong Kong’s government, but the middle class. Newish Chief Executive Carrie Lam is a Xi loyalist of the first order. But Lam’s first budget was distressingly mild and unimaginative, so devoid of ideas to raise Hong Kong’s game and diversify growth engines that it seemed ghost-written by Xi’s team. Bottom line, Hong Kong will grow ever more beholden to Beijing and less free to call its own shots.

That augurs poorly for Hong Kong’s prized competitiveness. Two decades after the return to Chinese rule, no one is deluded enough to think Beijing plans to emulate Kong Kong’s freer society and transparent markets. On Xi’s watch, since late 2012, Chinafication has accelerated and broadened. Beijing bullied local media, silenced dissent, reneged on promises to hold real elections and imposed “patriotic” education on schools. Xi also sought, essentially, to bribe Hong Kong’s masses with pledges of swelling bank accounts and easy access to mainland stocks.

In June, when Xi visited Hong Kong for the first time as president, he implored the masses to profit from China’s rise rather than defying it. But the average Hong Konger has missed out on the promised economic gains. Mainland cash is bidding up Hong Kong property prices putting homes further out of workers’ reach, an influx of mainland labor is restraining wages and a complacent government pretends all is well. Hong Kong’s Gini coefficient, a key measure of income disparity, is now 0.539, the highest in four decades.Canon

One reason Wong’s Pooh tweet irked Beijing so much is that the image suggested that Xi  was a threatening kind of bear. A reference to the heavy-handed police crackdown on Wong’s fellow student activists four years ago, perhaps. It could also allude to the economic pain imposed on many of Hong’s most vulnerable citizens in the form of budget policies that benefit pro-Beijing billionaires.

Xi now has a stronger hand to remake Hong Kong in Beijing’s image. A key worry is that Xi revives the “Article 23” anti-subversion process, or something approximating it. Since 2003, a succession of Hong Kong leaders have tried to alter Article 23 of the post-colonial constitution, known as the Basic Law, to police “any act of treason, secession, sedition, subversion” or the “theft of state secrets.” The ambiguous wording — and varied interpretation — of law changes would have a decidedly chilling effect on free speech and access to information, including in the economic arena. Increased opacity might make multinational companies rethink Hong Kong as a headquarters option.

Since November, Li Fei, chairman of the Basic Law Committee, has dropped too many hints for comfort that the government is anxious about the “adverse effects” from pro-independence forces. The odds of a legal crackdown are rising by the day. In 2012 and 2013, Beijing made a run at exporting its secretive black-box ethos to Hong Kong, including blocking access to personal data on company directors and ownership structures. Thankfully, shareholder activists and foreign chambers of commerce howled load enough to shelve changes that would have made it impossible to discern which politician owns what. Yet might a supersized Xi try anew to morph Hong Kong into a Cayman Islands of sorts for Communist Party members?

The other risk from vague anti-sedition laws is self-censorship. Investment giants from Goldman Sachs to Mitsubishi UFJ Trust and Banking Corp. have enough trouble angling for Chinese deals now. Fear of losing out on all aspects of mainland initial public offerings and mergers and acquisitions may face executives with Faustian bargains. A Western economist might be barred by compliance officials from making bearish company comments, investigating mainland debt levels or opining negatively on China’s economic health.

Might shortsellers with offices in Hong Kong fear regulatory reprisals for betting against a politically connected company? Would foreign journalists pull even more punches so as not to run into work-visa troubles? Might Fitch, Moody’s, Standard & Poor’s and other credit-raters go easy on sensitive companies or Beijing’s balance sheet fearing a loss of mainland business? Could Xi impose internet curbs? And what of Hong’s Kong’s ranking as the world’s freest economy? Surely, the Heritage Foundation, which awards that honor to Hong Kong year after year, would have to reconsider as Xi tightens the noose.

Hong Kong, of course, has always been an odd choice for free-market utopia. Its leader is chosen by communist Beijing and the city has a pegged currency, a rigidly controlled property market and the only government-backed Disney theme park. Hong Kong also is an oligarchic economy, dominated by a handful of tycoons.

It is instructive, though, that some of those moguls fear the widening inequality making them rich. Li Ka-shing, Hong Kong’s richest man, admits to losing sleep over the tale-of-two-cities dynamic fanning discontent. On the one hand, Li had 6.77 billion reasons to rest easy last year. That is how much in U.S. dollar terms his CK Assets sold worth of property contracts, a record.

But Li wants the government to work harder to narrow the rich-poor divide — he even backs higher taxes — lest Wong, now 21, and his ilk retake the streets. Unfortunately, Hong Kong’s latest budget is more of the let-them-eat-cake variety than an effort to spread the benefits of its roughly 3.8% growth rate.

Hong Kong needs to use its budget surplus to up investments in education, training and social safety nets. Instead, it is rich with gimmicks. One of the more bizarre handouts: giving 10,000 students free tickets to the loss-making Ocean Park theme park. Bad news for Disney, which — who knows? — may be paying a price for having a Winnie the Pooh ride.

The ride that should concern global investors and executives is how Xi may try to replicate some of China’s worst features in an economy Beijing should be emulating.

William Pesek is a Tokyo-based journalist and author of “Japanization: What the World Can Learn from Japan’s Lost Decades.” He has written for Bloomberg and Barron’s.




William Pesek is a Tokyo-based journalist and author of “Japanization: What the World Can Learn from Japan’s Lost Decades.” He has written for Bloomberg and Barron’s.

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