Hong Kong: Less Free to Choose

Friday, July 30, 1999

Anyone arriving in Hong Kong for a brief visit, as I did a few weeks ago, might feel compelled to ask out loud “whatever happened to laissez-faire?”

It doesn’t take long to perceive from talk in the Central District that many money men are appalled at the extent of government intervention. Returning to Tokyo but keeping abreast of Hong Kong developments, I find that the trend of government to behave as a know-it-all is continuing. Market forces are being ignored to the detriment of the Special Administrative Region’s future.

Laissez-faire is the doctrine opposing governmental interference in economic affairs beyond that necessary to maintain peace and property rights. No one believed Hong Kong was absolutely free, but the light administrative hand of the old British colonial government was the closest thing to allowing the market to rule.

Nobel Prize–winning economist Milton Friedman loved the old Hong Kong with its undisguised freedom. He said, “To see how the free market really works, Hong Kong is the place to go.” The “one country, two systems” slogan won’t work, Friedman told the late China boss Deng Xiaoping the last time they met.

Visit Hong Kong today and you’ll feel compelled to ask, “Whatever happened to laissez-faire?”

The new authoritarian government of Hong Kong is practicing a higher degree of state intervention than could have been imagined under British rule. Sir John James Cowperthwaite, the financial secretary who shaped Hong Kong’s wide-open financial policy of the 1960s, must be turning over in his grave as he sees his policies modeled after those of Adam Smith corrupted on the altar of expediency.

Hong Kong’s chief executive, Tung Chee-hwa, taking counsel from local and foreign business tycoons, has had the government buy up more blue-chip shares than any other single holder of equity. As much as 10 percent of the market has been nationalized, and overseas investors are beginning to look elsewhere.

Before going on a share-purchasing binge, akin to a sailor unloading his pockets the first night of shore leave, the government ordered a freeze on all land sales to prevent the property market from taking a nose dive. Or, as one analyst put it, “To help the big property developers from having to take reductions in the enormous profit margins they have traditionally enjoyed.”

The moves were supposedly taken to protect Hong Kong’s currency and ward off speculators, formerly known as foreign investors. Brazil’s abandoning its tie to the U.S. dollar in mid-January in the face of intensive pressure has led to new interest in the Hong Kong dollar, which is the leading Asian currency tied to the U.S. dollar to have survived.

The new government is practicing a higher degree of state intervention than anyone could have imagined.

China’s pledge not to devalue the yuan is also under fresh examination following Brazil’s decision to float the real. China is bolstered by a massive foreign exchange reserve—US$146.6 billion, the world’s second largest after Japan’s US$222.5 billion. Hong Kong’s US$90.1 billion in foreign currency reserves and its deserved high reputation for financial savvy give it initial protection against market pressures.

There used to be a saying on the China coast: “You’ll never get anywhere betting against Shanghai.” In the 1930s and 1940s Shanghai was the greatest city in Asia and clearly the elder brother to Hong Kong. It was also, by the way, the founding city of the Communist Party but also a key base for Chiang Kai-shek’s Nationalists. In short, quite a place.

The Communists took over in 1949 and made Shanghai into a great gray glob from which status it only began to recover in the 1980s. Meanwhile, Hong Kong prospered. By the 1960s Hong Kong had inherited the mantle of the city with the most moxie on the China coast. The saying changed to “You’ll never get anywhere betting against Hong Kong.”

Now things have gone full circle: Hong Kong declining, Shanghai rising. The Hong Kong economy today, as a matter of fact, looks suspiciously like Tung Chee-hwa’s old Orient Overseas Shipping Company. When things went wrong at Orient, Tung called on banks around the world, all of which turned him down. Finally he was bailed out by Beijing, through an intermediary.

Recently Tung called in foreign advisers in the same pattern. The group includes media mogul Rupert Murdoch, former U.S. Federal Reserve chairman Paul Volcker, former Hong Kong and Shanghai Bank boss Sir William Purves, and M. A. van den Bergh, who runs Siemens AG, among others. Japanese on Tung’s “international adivsory board” are Shoichiro Toyoda, chairman of Toyota Motor Corporation, and Tasuku Takagaki, chairman of the Bank of Tokyo-Mitsubishi Ltd.

Will Beijing bail out Hong Kong by devaluing its currency? Will the Hong Kong dollar peg to the U.S. dollar be removed in the final act of intervention in a game plan that has worked for years? I hate to say it but I think Hong Kong is heading for a fall.

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