Is Hong Kong over or back in competition with Singapore?

By Andy Mukherjee

The economist Stephen Roach’s pessimistic conclusions about Hong Kong’s future have triggered a heated debate, though most of the angry reactions to the former Morgan Stanley Asia Ltd. chair’s Financial Times article have been sparked by its provocative title: “It pains me to say Hong Kong is over.”

Is it? Any evaluation of the Chinese special territory’s prospects must go beyond the Hang Seng Index, a wealth marker typically associated with prosperity in a city purpose-built for commerce. Roach’s article notes how the benchmark has been basically flat since the former British colony's 1997 handover to Beijing. In the past five years, the gauge has slumped by nearly 45 per cent.

While Hong Kong’s revival plan after several years of ennui may succeed, fail, or produce middling outcomes, the real question to ask is if policies are moving in the right direction and taking enough ordinary people along. Financial Secretary Paul Chan’s annual budget Wednesday offers some clues.

During the pandemic, Hong Kong opened its war chest wide. According to the latest budget figures, by March the city will have burned through 37 per cent of the HK$1.17 trillion ($150 billion) fiscal reserves it had five years ago. A big part of the spending was on consumption vouchers, tax breaks and subsidies to businesses for maintaining headcount. The unemployment rate, which had surged to 8.5 per cent during the SARS epidemic of 2003, peaked at 7.2 per cent in 2021. It has since tapered off to 2.9 per cent. In other words, the administration did ameliorate financial hardship, even though its elusive quest for zero infections was draconian and pointless.

But now that the economy is out of its self-imposed isolation and growing again, policies seem to be taking a pro-wealth turn so that Hong Kong can again go back to its playing its historical role of competing with regional rival Singapore as a global financial center.

Examples abound. The cash-for-residency pathway that will open up for foreigners by the middle of this year asks for a minimum investment of HK$30 million ($3.8 million), half of the threshold for a similar program in Singapore. The family offices of the super-rich have been given tax exemption on a broad range of assets — and more flexibility than in Singapore on hiring talent and choosing their investments.

There’s nothing wrong in wooing the rich. However, it’s important to remember that the well-heeled understand the global competition for their bounty. Now that they have a sweet family-office deal, they’re lobbying for tax breaks on art, wine and collectibles. Chan didn’t say exactly what further concessions he would offer, but he did promise to increase the types of qualifying transactions. So the super-rich are getting what they want. Other high earners aren’t doing too badly, either. This year’s 1 percentage point increase on salary tax above HK$5 million in income takes the top rate to only 16 per cent. Singapore charges its rich 24 per cent.

And yet, a part of the Hong Kong political establishment is resentful of a HK$2 fixed fare for the elderly in public transport. All kinds of criticism of the program keeps swirling: Why did the previous administration reduce the eligibility age to 60 years from 65? Why can’t the old pay at least HK$3? In his budget speech, Chan said that he would review the program, but he doesn’t intend to cancel it.

Cradle-to-grave welfarism is not in the city’s laissez-faire DNA. But the rivalry with Singapore can’t just be restricted to wealth, tourism dollars and talent. Support for working families also merits a comparison. This year, the Southeast Asian city-state earmarked S$7.5 billion ($5.6 billion) to mainly help “young seniors” — Singaporeans aged between 50 and 64 — save more for retirement. That’s more than 10 times the annual cost of subsidized travel for Hong Kong’s elderly.

Hong Kong is an aging city with the world’s longest life expectancy. It’s a good thing if the old are keeping healthy by being out and about, and not sitting around in their cramped homes — or occupying beds in public hospitals. It is this gap in the understanding of the elite of what social services are worth supporting and working families’ experience of what they’re getting from the city that could delay — even derail — the revival.

After three years, the HK$5,000 to HK$10,000 consumption vouchers given to residents during the pandemic are finally gone, and rightly so. The economy needs a signal that it’s business as usual. For the same reason, it makes sense to gradually wean people away from special Covid-19 tax breaks. (The HK$10,000 cap on the rebate two years ago became HK$6,000 last year, and has been slashed again to HK$3,000 now.) But assisting secondary students with their exam fees? Given the city’s focus on talent, that could have continued for some more time.

Then again, a bigger problem lies in not what has changed for wage earners, but what has not. The standard offsets against the tax bill — a basic allowance and a child concession — remain the same. The latter was raised slightly last year, but mostly allowances have remained unchanged for years even as the cost of living has gone up. It makes economic sense to increase some of them. For instance, a generous boost to the tax deduction on voluntary health insurance premiums could increase take-up rates and relieve the pressure on public hospitals. Similarly, new parents need targeted subsidies. Last year’s HK$20,000 one-time baby bonus for children born in a three-year window is too small and too temporary to boost the dwindling birth rate.

The highlight of this year’s budget is the elimination of property cooling measures — additional stamp duties on buyers and sellers introduced since 2010. But beyond helping the government with taxes from land sales to developers, it’s unlikely that the cuts will do much. They may not shield existing homeowners from a further fall in prices, not when unsold new homes are at a 20-year-high. As my colleague Shuli Ren has argued, the removal of a punitive tax on buyers who flip their apartments may add to the selling pressure.

For buyers to be drawn into the market, interest rates will have to start coming down. But with its exchange rate tied to the US dollar, borrowing costs are not in Hong Kong’s control. Even as prices grind lower, Hong Kong property will still remain among the most expensive in the world, and simply out of reach for the average resident.

When it comes to determining its future, Hong Kong may have no sway over the big forces, such as China’s policies or the mainland’s relations with the West. What it does control, however, is a tidy sum of accumulated fiscal surpluses. It must put that to work for more of its people.