Pitfalls to avoid when pursuing prosperity

The idea of shared prosperity has come. The prospect of shared prosperity on the Chinese mainland is exciting, and the same can be said for Hong Kong. One of the problems of globalization interacting with capitalism is rising inequality. Some commentators had thought growing inequality was a contributing cause to the Great Depression in the 1930s. If growing inequality was a problem then, today the degree of inequality and the prevalence of the “winner-takes-all” phenomenon is truly mind-blowing. 

Various initiatives have been taken on the mainland to achieve shared prosperity, and I have no doubt that we need to address the problem here as well. However, in the pursuit of shared prosperity, we need to be careful to avoid some pitfalls. 

One of the most common complaints in Hong Kong is the unaffordability of housing. The Hong Kong Special Administrative Region government is now under tremendous pressure to address the problem. It is important that every step should be carefully studied and analyzed before implementation. We need to realize that since 2010, when the HKSAR government introduced the Special Stamp Duty, most buyers are users. These user-buyers are mostly middle-class people, who had painstakingly accumulated the savings or had pooled resources from close relatives to make the down payment, and who have to spend a significant chunk of their monthly incomes to make the installment payments. They typically would not qualify to apply for public rental housing, and they also pay taxes. Given the high housing prices today, if they buy a new flat from a private developer, it is likely that the price will be at least HK$20,000 ($2,570) per square foot. A 500- square-foot flat would cost HK$10 million. For older flats in less desirable locations, the per-square-foot price would generally be lower, but some very tiny former public rental housing flats did fetch HK$20,000 per square foot too. One tiny “nano” privatized flat (land premium paid) in Tseung Kwan O in King Lam Estate with a usable area of 153 square feet last year sold for HK$3.13 million. A more reasonably priced Tenants Purchase Scheme flat in Tai Wai sold for HK$4.18 million to a “Green Form” buyer. It was a 566-square-foot flat in Hin Keng Estate. The buyer was able to secure a 95 percent mortgage. So the down payment was considered affordable.        

It should be noted that the buyer of the nano flat was most probably a middle-class person or family, as he/she was neither a “White Form” applicant nor a Green Form applicant. Because bigger flats are more costly, many middle-class people were forced to buy tiny flats, which pushed the per-square-foot price through the roof. It should also be noted that the buyer of the Hin King Estate flat was not well-off. He/she had to take out a mortgage on 95 percent of the property price. The down payment was hard-earned money, and the monthly installment payments are also onerous.    

These buyers are in a precarious position. If housing prices decline 10 percent, the one who bought with a 5 percent down payment would be in negative equity territory. If housing prices decline by 20 percent, many families would have lost a huge fortune. Because the middle class is very important to the economy, when a large segment of the middle class suffers a serious financial setback, the implications can be far-reaching. 

Consider the 1998 housing crisis. While the official account blames it on the Asian financial crisis, some people blame it on the 85,000-flat yearly production target. My own analysis is that neither one nor the other, nor a combination of the two, caused the unprecedented plunge in the housing market. The implications were truly serious, and I had blamed it on the Tenants Purchase Scheme, and I predicted the turnout in an article published on March 24, 1998, in the South China Morning Post.    

In that article, I predicted: “Homeowners throughout Hong Kong will discover that their homes will fetch very low prices. Taxpayers will have to face heavier taxes. With heavier taxes, property prices will continue to be in the doldrums. The vibrant economy of Hong Kong will be a thing of the past.” To testify, an excerpt from the 2003 Policy Address reads: “To eliminate the fiscal deficit, we must adopt a three-pronged approach — boost economic growth, cut public expenditure, and raise revenue. … Our target is to reduce, through various means, Government’s projected spending of (HK)$220 billion in the operating accounts in 2006-2007 by (HK)$20 billion. We also intend to introduce appropriate tax increases and adjust government fees and charges upwards to help eliminate the fiscal deficit.” Sad for Hong Kong, the HKSAR government even decided in 2001 to reduce the intake of undergraduates in medicine by 50. Hiring of new civil servants was also suspended for several years.  

It is important to realize that the economy is like an ecological system. Domino effects can be set off by an apparently innocuous policy to produce a devastating effect. While we are keen on achieving shared prosperity, caution must be exercised.  

The author is director of the Pan Sutong Shanghai-Hong Kong Economic Policy Research Institute, Lingnan University

The views do not necessarily reflect those of China Daily.