US Federal Reserve Policies Promotes Anti-Market Sentiment in Hong Kong

Like Singapore, I pointed out that incumbent politicians have used symptoms of current bubble (negative real interest rates) policies to impose populist measures which in reality represent gradualist trend towards interventionism. This applies to Hong Kong too.

From Bloomberg,

Hong Kong’s new leader is taking up the battle his predecessor failed to win, seeking to overcome record low mortgage rates and an influx of Chinese buyers to make housing in the world’s most expensive city more affordable.

Leung Chun-ying, the property surveyor who took over as the city’s chief executive in July, on Aug. 30 said he’ll boost the supply of homes and start drafting laws giving preference to locals over buyers from mainland China. He’s trying to cool prices that surged 85 percent since 2009 even as predecessor Donald Tsang raised minimum mortgage deposits, added taxes and increased land sales in a losing bid to stem the boom.

Like Tsang, Leung has had to tweak demand and supply through curbs and land releases rather than monetary policy as Hong Kong’s currency peg to the U.S. dollar pushes borrowing costs to a record low. Banks, including HSBC Holdings Plc (HSBA) and Standard Chartered Plc (STAN), are charging homebuyers an average 2.17 percent, less than half that of six years ago, fueling demand along with the rising wealth of buyers from China’s mainland.

Hong Kong dollar has been pegged to US dollar via the currency board managed by the Hong Kong Monetary Authority. This means that US monetary policies has had significant influences to Hong Kong’s monetary environment which has mainly been vented through a local property boom.

Again from the same article,

U.S. Federal Reserve Chairman Ben Bernanke has pledged to keep interest rates low until at least 2014 and on Aug. 31 made the case for further easing to reduce unemployment in the world’s largest economy. The Hong Kong Monetary Authority keeps its lending rate tied to the Fed to maintain the currency’s peg to the U.S. dollar…

Tsang raised the minimum deposit for some mortgages three times since August 2010, with borrowers now having to put down 40 percent for home purchases of more than HK$7 million ($902,000). He also introduced an additional stamp duty on residential units sold within two years of purchase.

While transactions are down, prices are up. The value of new mortgages fell 42 percent to HK$98.1 billion in the first seven months of this year, while the number of homes sold dropped 22 percent, according to data from the HKMA and the Land Registry. Home prices have gained 12 percent this year, according to Centaline Property Agency Ltd.

BOC Hong Kong Holdings Ltd. (2388), the biggest Hong Kong-based lender, has risen 33 percent this year, the best performer in the 12-member Hang Seng Finance Index. Hang Seng Bank Ltd. (11) has the second best return in the index with 19 percent. The two lenders accounted for a combined 32 percent of the city’s mortgage market, according to mReferral Mortgage Services…

Hong Kong home prices are 65 percent higher than Tokyo’s, the world’s second-priciest place to buy a home, according to a study by Savills Plc (SVS) published last September that compares prices in 10 global cities including New York and London.

Hong Kong’s negative real rate regime has been very pronounced. (chart from Tradingeconomics.com)

Yet instead of dealing with disease, the new leadership will practically will apply the same process of the politicization of land sales and distribution that has not only been ineffective but has promoted charges of cronyism.

As I previously wrote,

While some of Hong Kong’s wealthiest may have made their fortunes from cronyism (or politicized real estate policies), the above critics who resort to claims of “oligopolies and monopolies” that leads to “high prices land policy” and “glorified slavery” fails to recognize that Hong Kong’s property boom has also been influenced by the US Federal Reserve policies via the US dollar peg.

The point is that not only has the easy money policies of the US Federal Reserve been blowing Hong Kong’s bubble cycles, at worst such policies have been gnawing at Hong Kong’s relative free market environment by whetting or stoking on populist anti-market sentiment and the promotion of the mixed economy-welfare state. In short, bubble policies function like a political Trojan horse for destabilization

Hong Kong authorities should deal with the US dollar peg rather than intervene in the marketplace. Perhaps they should consider the proposal, which I earlier noted here, by Prof Joseph Yam, the former head of the Hong Kong Monetary Authority (HKMA), who is also one of the architects of Hong Kong-US dollar peg through a monetary board, to alter Hong Kong’s monetary system by shifting from US dollar peg towards China’s yuan or through a basket of other currencies. They could also consider Yuanization or using mainland currency by scrapping the Hong Kong dollar altogether.

By the way, price actions of Hong Kong’s Hang Seng Index seems ominous.

(chart from Bloomberg)

The bearish head and shoulder pattern may become a reality if Hong Kong’s domestic bubble will implode or if China will endure a recession-financial crisis or if a global recession happens. Incidentally, thanks to Ben Bernanke and his global central bank colleagues, all three factors are seemingly in play.

Is Hong Kong’s Free Economy a Myth?

Hong Kong has been known as the freest economy in the world.

But skeptics argue that such claims may not be accurate as Hong Kong’s capitalist political economy may have been shadowed by cronyism.

Writes Eddie Leung and Pepe Escobar at the Asia Times,

For the Heritage Foundation is a matter of routine to rank Hong Kong as the freest economy in the world - with a whopping overall score of 89.9 compared with a world average of 59.5. This Milton-Friedmanesque paradise is extolled for "small government, low taxes and light regulation".

Much is made of "business freedom" and "labor freedom". True - you can open a business in three days; you just need a Hong Kong ID, a form and US$350. But depending on the business, you will be squeezed by monopolies and oligopolies in no time. And if you are "labor", chances are in most cases you can only aspire to some sort of glorified slavery.

Heritage researchers may be excused for losing the plot between dinners at the Mandarin Oriental and partying in Lan Kwai Fong, both favored drinking and dining spots near the central business district. Behind all those luxury malls and the best bottles of Margaux, real life Hong Kong has absolutely nothing to do with a free economy encouraging competition on a level playing field. It's more like a rigged game.

The dark secret at the heart of Hong Kong is the unmitigated collusion between the government and a property cartel - controlled by just a few tycoons; the Lis, the Kwoks, the Lees, the Chengs, the Pao and Woo duo, and the Kadoories (more about them on part 2 of this report). These tycoons and their close business associates also happen to dominate seats on the 1,200-member Election Committee that chooses Hong Kong's chief executive…

We should be back again to a Chinese maxim: land is power. All the conglomerates controlled by Hong Kong tycoons are fattened on owning land. The local government is the sole supplier of land. So no wonder it keeps a vested interest in the property market - and that's a huge understatement - as it pockets fortunes from land sales and premiums on so-called "lease modifications".

As for the maxim that prevails across the city's property market cycles, it's always been the same: "Buy low and sell high".

Read the rest here.

Hong Kong has certainly not been an ideal laissez faire economy as no country in this world has been.

But rankings of economic freedom, whether by Heritage Foundation or by the Fraser Institute, has been relatively established and have not been measured on absolute terms.

It is also important to note that for as long as the distribution of any resources are politically determined, the natural outcome will be one of collusion, horse trading, favoritism and corruption.

Virtuous or moral government is an illusion more than Hong Kong’s free economy is a myth.

Government officials are human beings too limited by knowledge problem, cognitive biases, value preferences (determined by education, religion, culture, ideologies, family values and etc…), peer pressure, social standings, career ambitions and etc...

While some of Hong Kong’s wealthiest may have made their fortunes from cronyism (or politicized real estate policies), the above critics who resort to claims of “oligopolies and monopolies” that leads to “high prices land policy” and “glorified slavery” fails to recognize that Hong Kong’s property boom has also been influenced by the US Federal Reserve policies via the US dollar peg.

Also Asia’s increasing social mobility has been an influence to Hong Kong’s property market.

Hong Kong has been the second hottest property market in the world according to MSNBC.com

The growing wealth of mainland Chinese, coupled with China’s property restrictions, has led to an influx of mainland buyers into Hong Kong’s residential market in recent years. According to industry estimates, three in 10 deals in Hong Kong’s luxury property markets are done by mainland Chinese buyers.

Property restrictions too add to the politicization of Hong Kong’s real estate market.

Finally the above authors seem to have misunderstood the meaning of competition by which they ascribe to flawed neo-classical concepts of oligopolies and monopolies through “captive markets” or “limited competition”.

Let me quote the explanation of Austrian economist Dr. George Reisman (bold emphasis mine)

Actual price competition is an omnipresent phenomenon in a capitalist economy. But it is completely unlike the kind of pricing envisioned by the doctrine of "pure and perfect competition." It is not the product of a mass of short-sighted, individually insignificant little chiselers, each of whom acts to cut his price in the hope that his action won't be noticed by any of the others. The real-life competitor who cuts his price does not live in a rat's world, hoping to scurry away undetected with a morsel of the cheese of thousands of other rats, only to find that they too have been guided by the same stupidity, with the result that all have less cheese.

The competitor who cuts his price is fully aware of the impact on other competitors and that they will try to match his price. He acts in the knowledge that some of them will not be able to afford the cut, while he is, and that he will eventually pick up their business, as well as a major portion of any additional business that may come to the industry as a whole as the result of charging a lower price. He is able to afford the cut when and if his productive efficiency is greater than theirs, which lowers his costs to a level they cannot match.

The ability to lower the costs of production is the base of price competition. It enables an efficient producer who lowers his prices, to gain most of the new customers in his field; his lower costs become the source of additional profits, the reinvestment of which enables him to expand his capacity. Furthermore, his cost-cutting ability permits him to forestall the potential competition of outsiders who might be tempted to enter his field, drawn by the hope of making profits at high prices, but who cannot match his cost efficiency and, consequently, his lower prices. Thus price competition, under capitalism, is the result of a contest of efficiency, competence, ability.

Price competition is not the self-sacrificial chiseling of prices to "marginal cost" or their day by day, minute by minute adjustment to the requirements of "rationing scarce capacity." It is the setting of prices perhaps only once a year — by the most efficient, lowest-cost producers, motivated by their own self-interest. The extent of the price competition varies in direct proportion to the size and the economic potency of these producers. It is firms like Ford, General Motors and A & P — not a microscopic-sized wheat farmer or sharecropper — that are responsible for price competition. The price competition of the giant Ford Motor Company reduced the price of automobiles from a level at which they could be only rich men's toys to a level at which a low-paid laborer could afford to own a car. The price competition of General Motors was so intense that firms like Kaiser and Studebaker could not meet it. The price competition of A & P was so successful that the supporters of "pure and perfect competition" have never stopped complaining about all the two-by-four grocery stores that had to go out of business.

I agree that there have been accounts of cronyism in Hong Kong. But Hong Kong’s largely open economy has also been materially influenced by external forces (monetary transmission and mainland immigration and or speculation), focusing on one at the expense of the other only exposes of analytical bias and would signify a big mistake.

Thus to conclude that Hong Kong’s political economy has veered towards an oligarchic-monopolistic environment would “currently” seem exaggerated as there has been little evidence of the deficiency of price competition in the context of the promotion of efficiency, competence and ability.

I say “current” because Hong Kong seems to have taken the slippery slope towards China’s mixed economy (by the introduction of minimum wages) which may change the incumbent political economic setting.

Hong Kong may not be a laissez faire or classical liberal paradise, but relatively speaking, I don’t think that Hong Kong’s free market has been a myth, especially not when compared to the Philippines.

Does China’s Special Currency Test Zone Signal the End of the Hong Kong- US Dollar Peg?

China’s government plans to open direct lending access between Hong Kong banks and China based companies through a special currency “test” zone

Reports the CNN/Financial Times

China plans to create a special zone to experiment with currency convertibility in Shenzhen, the city where it introduced key economic reforms three decades ago.

The measure will enable Hong Kong banks to lend renminbi directly to companies in Qianhai Bay -- a new economic zone on a peninsula across the water from Hong Kong -- according to Chinese state media.

Bejing will unveil the details on Friday as Hu Jintao, Chinese president, visits Hong Kong for the 15th anniversary of the handover of the city from Britain.

Analysts say the experiment could prove as critical to eventually dismantling capital controls as Deng Xiaoping's reforms were to opening China to the world.

The Qianhai experiment follows a series of steps taken by the Chinese government to move towards making the renminbi a convertible currency that analysts believe could one day vie with the US dollar for pre-eminence in global markets.

Over the past two years, Chinese companies have been allowed to settle most of their international trade in renminbi. This has provided a conduit for the currency to flow abroad for the first time in large volumes.

Foreign institutions have also been given a limited but growing array of investment options for their renminbi holdings, such as Hong Kong's dim sum bond market and a programme for buying Chinese equities.

In addition, the proposed measures includes cross listings of their respective stock exchanges.

Again from the same article,

Separately on Friday, the stock exchanges of Hong Kong, Shanghai and Shenzhen said they would create a joint venture index company to give investors access to companies listed in all three cities for the first time and boost their capital markets.

Charles Li, chief executive of the Hong Kong Exchange, said it would create its first cross-border indices by the end of the year and launch derivative products and exchange traded funds based on the indices and stocks next year.

The thrust to make the yuan convertible has widely been painted as a challenge to the US dollar standard as evidenced by this assertion “could one day vie with the US dollar for pre-eminence in global markets”.

While this is true, I would say that a more important issue could be about the insurance role played by the yuan against the growing risks of a currency crisis.

My suspicions seems to be highlighted by the latest proposal by Prof Joseph Yam, the former head of the Hong Kong Monetary Authority (HKMA) and who is one of the architects of Hong Kong-US dollar peg through a monetary board, to alter Hong Kong’s monetary system by shifting from US dollar peg towards China’s yuan or through a basket of other currencies.

Notes the BBC

When asked why he was making such a dramatic public reversal of opinion, Prof Yam told Hong Kong media it was because times had changed.

The US dollar peg had contributed to inflation and asset bubbles in Hong Kong because of the policy of quantitative easing the US Federal Reserve adopted following the global financial crisis, he said.

This direct Hong Kong-China currency “test” zone seems like an icebreaker to the inevitable end the Hong Kong dollar-US dollar peg.

As I observed in August of 2009

In my view, the Hong Kong dollar's pegged days seems numbered. And so as its existence, as the Yuan could displace it sometime in the near future.

Hong Kong’s Vicious Inflation Cycle

Even supposed free market economies are susceptible to the follies of “free lunch” politics

From the Bloomberg, (bold highlights)

Hong Kong’s financial secretary caved in to protests over plans to bolster residents’ pension funds, opting to hand out cash and tax rebates that a week ago he said would stoke inflation.

John Tsang said he will give HK$6,000 ($770) to permanent residents aged 18 or above, abandoning a Feb. 23 budget plan to inject the same amount into their pension fund accounts after polls showed the government’s popularity slumped. The government also plans to give the 38 percent of the workforce that pays income tax a 75 percent rebate capped at HK$6,000.

“The fact that half a year of hard work preparing the budget can be thrown away and started again shows populism and not rationality dictates the policy-making process,” said Ivan Choi, a lecturer at the Chinese University of Hong Kong’s government and politics department. “The government will pay for the damage done to its integrity.”

Political parties attacked Tsang for failing to do enough to alleviate the impact of soaring food and housing costs. Asian governments are grappling with inflation fueled by rising commodity costs and capital flows from developed economies drawn by the region’s faster economic growth.

Tsang said when he announced his budget a week ago that battling inflation and getting ahead of a property bubble are his government’s main tasks this year. The cash handouts and tax rebates will cost the government about HK$40.5 billion, a government spokesman Patrick Wong said today. The pension handout was to cost the government HK$24 billion.

Politicians and the bureaucracy always attack the symptom rather than the cause. Politicians and the bureaucracy will not address the primary cause which is the inflationist “bubble” or “wealth effect” policies implemented by both the Hong Kong government and the implied transmission of the US Federal Reserves policies via the US pegged Hong Kong Dollar.

And inflation will be fed by more inflation, which eventually will be countered by price controls leading to more imbalances, and more political accommodation via inflation—until the whole process implodes.

This is just another example depicting how central planning, whether executed by the government or the central banks, does not contribute to the upholding of free market principles.

As the Ludwig von Mises wrote,

An essential point in the social philosophy of interventionism is the existence of an inexhaustible fund which can be squeezed forever. The whole system of interventionism collapses when this fountain is drained off: The Santa Claus principle liquidates itself.

The Santa Claus principle will end with the collapse of the present monetary system.