Unless You're a Tycoon, Hong Kong Life Is Harder Than Ever (1)

(Bloomberg) -- Mrs. Lau can’t help but glance nervously at the calendar. Her next paycheck isn’t for a week, and she doesn’t have enough money to feed her family of four crammed into her small, government-subsidized Hong Kong apartment. Her husband can’t work, and the kids don’t understand why their mother keeps buying stale food.

"We’ll eat rice soup for all three meals," said the 42-year-old, a cashier at the Wellcome supermarket chain controlled by the Jardine Matheson group. Lau, who asked that only her surname be used, has been the sole provider for her 7-year-old daughter and 15-year-old son since her husband injured his back. She makes the equivalent of $5.40 an hour, nowhere near the $15-an-hour minimum wage in cities like Seattle, where the cost of living is cheaper.

It’s an increasingly familiar tale in Hong Kong, a city of soaring skyscrapers and glittering luxury boutiques that’s become perhaps the epitome of income inequality in the developed world. Two decades after Britain handed the former colony over to China, its richest citizens -- billionaires such as Li Ka-shing and Lee Shau Kee -- are thriving, thanks to surging real estate prices and their oligopolistic control over the city’s retail outlets, utilities, telecommunications and ports. But not people like Lau.

"Hong Kong is an incredibly extreme case of unmitigated inequality, with very little in place to stop it," said Richard Florida, author of "The New Urban Crisis" and a director at the Martin Prosperity Institute in Toronto. "I don’t see it as being sustainable. It’s not the economics, it’s the political backlash. It generates a backlash, and people just get angry eventually."

Hong Kong’s struggle to help its citizens improve their lives may represent the greatest challenge to its unique economic model. The city has been lionized for decades by some economists as the closest thing to a free economy, with few regulations of any kind, and no retail sales or capital gains taxes. More than half of Hong Kong’s working population, including Lau, live below the level at which they must pay income tax -- and for the minority who do, the standard rate is a low 15 percent.

But wages have failed to keep up with costs, leaving hundreds of thousands of Hong Kong people barely able to get by. A common measure of inequality, the Gini coefficient, in which 0 is absolute equality and 1 is all money in a single person’s hands, illustrates the problem: The latest figure out last week puts Hong Kong at a record 0.539, the highest since data started being kept in the 1970s. It’s the biggest disparity in Asia, greater than places like Papua New Guinea and Brazil.

"Hong Kong is a very interesting case study, where profits are sheltered from competition while labor cannot easily organize," said Emmanuel Saez, an economics professor at the University of California, Berkeley, who often collaborates with Thomas Piketty, the French economist who wrote "Capital in the Twenty-First Century." "This leads to very high inequality."

In some respects, Hong Kong is experiencing a turbo-charged version of the growing divide evident elsewhere. Formerly remunerative manufacturing jobs -- Hong Kong used to be the world’s toy-making capital -- have vanished, replaced at one end of the spectrum by highly paid bankers and at the other by low-wage waiters and floor sweepers.

Perverse Effect

Originally intended to stimulate entrepreneurial dynamism, the hands-off approach may have ended up having a perverse effect, allowing a few large companies to entrench their positions and ultimately stifle competition. Charges of collusion between business and government have felled several officials and led to public discontent.

"The earlier generations have managed to entrench themselves so effectively, it becomes much more difficult for a new upstart," said Steve Tsang, director of the China Institute at London’s School of Oriental and African Studies.

Even deep-pocketed foreign companies have trouble breaking in. French supermarket giant Carrefour SA spent four years trying to build a Hong Kong footprint before abandoning the city in 2000, citing the difficulty of obtaining store locations. That’s not a problem for the two dominant supermarket chains, Wellcome and ParknShop, which are backed by their parent companies: Jardines and CK Hutchison Holdings Ltd.

Debates about Hong Kong’s rich and poor tend to come back to one word: land. Housing is the least affordable in the world, according to housing-policy think tank Demographia, with median prices relative to incomes far outstripping those of Sydney, London and San Francisco. Home prices have risen nearly 400 percent since a real estate slump ended 14 years ago.

That’s created an unpleasant lexicon for living conditions unknown in other cities. "Cage homes," as the name suggests, are compartments of wire mesh barely large enough to hold a single bed, often stacked on open-plan tenement floors. "Coffin home" berths are slightly larger and offer a modicum of privacy thanks to walls made of wood or plaster. For the middle class, developers have been building an increasing number of micro-apartments, the smallest just 128 square feet, with price tags of more than $400,000.

Almost all the city’s richest people largely owe their fortunes to real estate development. The wealthiest is Li, whose Cheung Kong Property Holdings Ltd. posted HK$18 billion in underlying profit last year. The runner-up is Lee, whose Henderson Land Development Co. made HK$14.2 billion. The assets of the 10 wealthiest people now equal 48 percent of Hong Kong’s economy, according to the Bloomberg Billionaires Index.

They’ve thrived within a peculiar system in which the Hong Kong government, which technically owns all available land, auctions off long-term leases to developers, some of whom are indirectly on both sides of the exchange. Hong Kong’s political leader is selected by a 1,200-member committee of notables, including Li and Lee, and others made wealthy by the system. This is part of why tycoons have an advantage, said Mathew Wong, an assistant professor at the University of Hong Kong who studies inequality and democracy.

"The housing market is a huge struggle," said Fred McMahon, a resident fellow at Canada’s free-market Fraser Institute. The think tank’s annual economic freedom index gives top honors to Hong Kong, a status that "highly correlates with economic well-being, but not exactly," he said.

Read more: The global debate over income inequality -- a QuickTake

Hong Kong’s leaders have taken some steps to help. They introduced a minimum wage for the first time in 2011. It’s now HK$34.50 an hour, or $4.43 -- a level the U.S. exceeded in 1996. In 2015, the first-ever broad antitrust law was passed; previously, no formal competition rules existed, apart from in telecommunications and broadcasting. Incoming Chief Executive Carrie Lam has pledged to step up construction of affordable apartments and improve education to help workers get higher-paid jobs.

Hong Kong certainly has economic successes to boast about. Gross domestic product per head is $45,000, greater than in Germany, Japan or France, according to the International Monetary Fund. Life expectancy compares favorably against western Europe, and Hong Kong’s citizens benefit from some of the best rail, road and airport infrastructure in the world.

"You won’t see people dying of hunger or cold," said Michael Tien, a lawmaker who also owns local clothing chain G2000. He tried living the life of a poor Hong Konger for a 2010 TV show, sleeping in a cage home and working as a street sweeper for two days, and found it untenable.

Hong Kong continues to construct subsidized apartments. More than 2 million people out of 7 million-plus live in public rental housing paying an average $220 a month. Typically in outlying areas, they feature rows of identical towers of 50 stories or more -- hardly luxurious, but modern and relatively affordable. Still, waiting times can stretch nearly five years.

With living standards lagging behind rising costs, some Hong Kong citizens have begun to wonder what was once unthinkable: whether folks across the border in mainland China might be better off. Take Yu Wen-mei, 61. She started working in a garment factory in the 1970s and recalls ferrying food and appliances to grateful relatives in Guangdong province in the 1980s. As low-end manufacturing disappeared, she took a job in a Motorola plant, which closed in 2000. She’s a mall security guard now, earning minimum wage.

"Now, they have everything," she said of her mainland relatives.

For Lau, the supermarket cashier, little is likely to change. Living paycheck to paycheck is actually an improvement. Before qualifying for a subsidized apartment two years ago, she had to work three jobs to make the rent on a HK$5,000-a-month apartment in Sham Shui Po, Hong Kong’s poorest neighborhood, that was half the size.

"I almost went crazy," said Lau, fighting back tears. She still has no savings and hasn’t taken time off since 2010. "I just hope my kids have higher educational qualifications and don’t repeat my path. I don’t see hope in my future."

(Updates wealth statistic in 14th paragraph.)

--With assistance from Yue Qiu

To contact the reporters on this story: Prudence Ho in Hong Kong at pho83@bloomberg.net, Matthew Campbell in London at mcampbell39@bloomberg.net.

To contact the editors responsible for this story: Young-Sam Cho at ycho2@bloomberg.net, Sheridan Prasso

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