Betting Hong Kong will let go of the peg

DAPPER, articulate Harvard-trained billionaire hedge-fund manager William Ackman, 44, the founder of New York-based Pershing Square Capital Management LP, has made some audacious bets in his lifetime, such as successfully shorting municipal bond insurer MBIA, and some not-so-smart ones like his bet on the revival of Borders' bookstores and, much later, rival Barnes & Noble. More recently, his bet on department store operator JC Penney has been faltering.

Traders in Asia know Ackman through his biggest bet in the region — against Hong Kong's 29-year-old US dollar peg. In recent weeks, just as Ackman has been doubling down on his bet that the peg won't last and the currency will appreciate, the Hong Kong Monetary Authority has been stepping in to sell the local currency to prevent it from rising. On Nov 1, the HKMA intervened again. It was the seventh time in two weeks that it had been forced to do so.

Blame it all on the third round of quantitative easing, or QE3. Money has been pouring into Hong Kong for months now and that's been putting pressure on the peg. Aside from trying to keep the likes of Ackerman at bay, Hong Kong has been trying to pour cold water on its overheated property market. A week ago, the Special Administrative Region imposed a 15% tax on non-resident and corporate buyers of property and the government has vowed to introduce further curbs unless there is evidence that the market is cooling.

But the events of the past few weeks have started a bigger debate in Hong Kong and across the region about why the territory at the edge of the Chinese mainland now needs a bold new vision to firm up its niche as other Chinese cities such as Shanghai nip at its heel.

To do that, Hong Kong must make structural changes to what is clearly seen by some as a rigged economy. It's an economy that is run by cartels. There is a duopoly in groceries, with two supermarket chains — owned by billionaire Li Ka-shing and Jardine Matheson — cornering more than 90% of the grocery business there. There is a duopoly in electricity supply, again with Li and the Kadoorie family controlling two main power utilities. Li, his son Richard and Sun Hung Kai's Kwok family control three of the four large cellular-phone firms in Hong Kong.

As for real estate, just five families — the Lis, Kwoks, Henderson Land's Lees, New World Development's Chengs and Sino Land's Ngs — dominate Hong Kong's property market. So much so that until recently, one could make a decent case of collusion between big property developers and the government. Make no mistake, the giant developers have played an important role in helping build Hong Kong into the global city that it is today, but they have done so on a playing field that was skewed to keep competing mid-sized and smaller players at bay.

Traditionally, the Hong Kong government's mantra was "we don't have enough land". Yet, anyone who has been to the New Territories knows that you could build another Hong Kong on all the surplus land. The "scarcity of land" line is just a good excuse to keep land prices high. Hong Kong has been able to keep taxes low by rationing the release of high-priced land, which keeps going up in value the longer the government delays its release. Clearly, the government doesn't want to open all of Hong Kong up too quickly. There is a strong property lobby that doesn't want too much land to be sold. The big five property developers hold huge and growing landbanks, which they constantly revalue and, therefore, don't want to see more land being sold as that will depress the prices of their existing assets.

High land prices keep the oligopoly intact. Because of the increasing scale of property projects in Hong Kong, smaller developers just can't participate in the most lucrative segment of the market, forcing them to go after smaller and niche projects. Over the past 20 years, the big five developers have grown bigger, while mid-sized and smaller developers have been squeezed out of the market. Because the oligopoly helps keep real-estate prices up, everyone else in Hong Kong has a convenient excuse to raise prices.

An acquaintance of mine, a US-born former Hong Kong resident who regularly flies around Asia for business, told me recently that a few things strike him about Hong Kong. First, the standard of English in Hong Kong, a former British colony, is poor, and that applies to everyone, from taxi drivers to restaurant waitresses and mid-tier executives. He can communicate better in Ho Chi Minh City and Shanghai than in Hong Kong. Secondly, the quality of life in Hong Kong is poor and deteriorating. Pollution is a huge issue. I know a number of people in Singapore who say they didn't want to move to Hong Kong for the attractive jobs they were offered because of pollution, the lack of international schools or playgrounds for their kids and good private hospitals.

You can't have a huge green belt and lots of nice parks if you have a bunch of greedy property developers salivating over a little piece of land. You can't have lots of private hospitals in the centre of town if developers are keen to turn existing hospitals into high-rise shoebox flats.

But little things aside, Hong Kong's biggest problem is that it has overlooked the big picture. There is clearly no vision or big blueprint for the future. It is remarkable that it has gotten to where it is without some kind of a master plan. After the handover from British rule in 1997, it sort of bumbled along for 15 years on the back of China's growth. But that's changing under new Chief Executive Leung Chun-ying. He wasn't the initial favourite of Beijing and certainly wasn't the candidate that billionaire property tycoons endorsed, yet he won anyway. Leung, who served on the board of DBS Bank for years, is an admirer of Singapore and believes that Hong Kong can take a leaf from the city-state's playbook. He has been articulating that muddling along isn't the right approach for Hong Kong, which needs to set realistic goals and go after them.

Just four months into his job, Leung is trying to put in place some form of a vision for Hong Kong. He has been talking about pollution, healthcare, education standards and competition policy. He wants to build more schools and hospitals and he wants the private sector to build hospitals as well. Yet, he is battling too many entrenched vested interests in the territory. Many people thought his "vision" thing was all big talk to get elected and that he would warm up to Hong Kong's property billionaires as soon as he took office, but so far, he has proved to be his own man and has not shown any desire to compromise on key principles.

While there are no quick fixes for Hong Kong and it might take years to address some of the bigger issues plaguing the territory, it would be a mistake to write it off. Its last colonial governor, Chris Patten, once said that "nobody has ever gotten rich betting against Hong Kong". The territory's fortunes are tied to a racehorse called China that keeps galloping away. Hong Kong is the waterskier clinging on to the rope at the back of the Chinese speedboat. As long as the speedboat is roaring away, Hong Kong will do fine. But if the speedboat has sudden stops and starts, the way some people believe the Chinese economy is likely to perform over the next few years, the waterskier might be thrown off balance. Ackman is betting that sooner or later, Hong Kong will opt for quick adjustments and might even let go of the peg.

This story first appeared in The Edge Singapore weekly edition of Nov 5-11, 2012.


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