Hong Kong—After the Fireworks

July 9 1997 3:30 AM

Hong Kong—After the Fireworks

Democracy goes into reverse, but liquidity drives a boom.

(Continued from Page 1)

Beijing has encouraged more Chinese companies to come to Hong Kong to fill the commercial vacuum left by departing British companies such as the Jardine group. In recent months, Chinese corporations have taken stakes in Hong Kong Telecom, Dragon Air, and China Light & Power. More strategic takeovers are likely; Hong Kong Electric and Hong Kong Bank are two prime targets. Meanwhile, in June alone, big Chinese enterprises affiliated with ministries and local governments raised 17.5 billion Hong Kong dollars (U.S. $2.26 billion) from banks and the stock market. Such large-scale fund raising has confirmed Hong Kong's unique status as the Wall Street of China.

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The stock market will continue to prosper in the coming months if more Chinese money rushes into town. One Hong Kong-based brokerage estimates that inflows will grow to $75.94 billion this year, 24 percent more than in 1996. Part of the torrent has moved into the local property market, raising prices by as much as 50 percent for prime residential blocks in the first half of this year.

Tung has vowed to crack down on property speculators, but many think his bark will be worse than his bite. The government itself relies on revenue from land sales to finance its budget, while banks are too heavily exposed in property lending to allow any property downturn. Still, Tung is likely to impose some short-term measures, such as a capital gains tax, to show that he is serious about tackling Hong Kong's housing shortage, which is its most visible economic problem. In his first policy speech following the handover, Tung promised to accelerate government land sales, with the ambitious aim of raising the proportion of homeowners to 70 percent within 10 years.

Hong Kong's long-term prospects are mixed. Critics say the territory has not invested enough in technology and developing human resources to meet the needs of its increasingly service-based economy. Instead, capital has gone to property investment, inflating asset prices and making the city the most expensive in the world. The issue will become more pressing as an estimated 40,000 to 50,000 Chinese, mostly unskilled, come to settle each year. Others say Hong Kong has enough vitality to adjust itself to the needs of the future and that the government does not need to intervene. Tung, however, has indicated that he wishes to support manufacturing, even though the sector accounts for a mere 10 percent to 20 percent of the city's GDP (depending on what definition is used). Tung's first salvo as the territory's leader is likely to include the introduction of policies to help develop long-term, high-tech industries, a special challenge in a place where short-term financial operations and property businesses have helped many to become millionaires overnight.

© July 1997, Oxford Analytica Ltd., 5 Alfred St., Oxford OX1 4EH, U.K. Any reproduction in whole or in part without the written consent of Oxford Analytica Ltd. is strictly forbidden.

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