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June 17th, 2006:

Pall Of Gloom Over Hong Kong

Jun 17, 2006 – By Kent Ewing – Asia Times Online

HONG KONG – After years of economic gloom following the Asian financial crisis of 1987 and the handover to Chinese rule in the same year, this city’s economy is booming again.

With gross domestic product (GDP) growing 8.2% in the first quarter of the year and government coffers overflowing with a surplus expected to be at least US$1.2 billion, Hong Kong officials should be exhorting the city’s 7 million people to let the good times roll as the ninth anniversary of the handover from British to Chinese rule approaches on July 1.

What, then, is everyone so worried about?

Fortune magazine’s famously provocative 1995 article “The death of Hong Kong” turned out to be a false prediction. But as mainland China’s economy continues its extraordinary rise and Hong Kong strains to keep up, the marginalization of this once-undisputed hub of Asia looms as a distinct possibility, despite its current prosperity.

Ironically, the most urgent threat to Hong Kong’s competitiveness – the city’s increasingly foul air – is intimately tied to the phenomenal growth on the mainland, particularly in the Pearl River Delta in neighboring Guangdong province. This is where more than 70,000 largely unregulated Hong Kong-invested factories belch poisonous pollutants into the air on a daily basis.

While the factory owners have become rich as a result of the low labor and manufacturing costs in the region, their once-beautiful city has become a sick patient in need of emergency care. Although there are other contributing factors – automobile emissions and lack of concern by the two privately owned local electricity suppliers, Hong Kong Electric and China Power and Light – there is a general consensus that the bulk of Hong Kong’s pollution creeps over the border from the factories in the delta.

Chinese authorities always hoped that manufacturing in Guangdong would combine with Hong Kong’s superb financial and service industries to create a gateway to China for a flood of foreign capital, and the formula has worked brilliantly – except that it is now hard to breathe.

The problem has become so acute that it is no longer just green groups and fringe politicians who are harping about it. The city’s international business class has chimed in, urging the Hong Kong government to develop a more coordinated anti-pollution strategy with mainland officials.

Speaking recently for the International Business Chamber, which represents overseas chambers of commerce in the city, Jens-Erik Olsen expressed the business community’s recruiting fears, which are directly related to Hong Kong’s unhealthy environment.

“We are going to tell the government that we [Hong Kong] are no longer attractive to professionals,” he said, “because they do not want their children to live in Hong Kong.”

Olsen was speaking in the aftermath of the release of a survey on living conditions in 257 cities worldwide conducted by ECA International, a global human-resources organization. ECA International shocked Hong Kong people with its recommendation that companies recruiting expatriates to work here should offer them a 10% hardship allowance in addition to their basic pay and other perquisites.

The survey showed concern about food scares, infectious diseases such as severe acute respiratory syndrome (SARS) and bird flu, as well as worries about the typhoon season that buffets the city every year. But it was definitely Hong Kong’s polluted skies that tipped the scales toward “hardship”.

While the survey ranked Hong Kong in the top five cities for Asians within Asia, the city fell below its arch-rival, pristine Singapore, as well as three Japanese cities: Kobe, Yokohama and Tokyo. What’s more, on a global scale for Asians living abroad, Hong Kong dropped from its 20th slot last year to 32nd this year.

According to study released this month, the city’s choking air quality is costing Hong Kong 1,600 lives and nearly US$258 million in health-care costs and lost productivity each year. The study – carried out by a team of experts from the University of Hong Kong, Hong Kong University of Science and Technology, Chinese University and think-tank Civic Exchange – found that Hong Kong’s air pollutants exceeded World Health Organization standards by 200%.

So, as alarm bells ring, one of the city’s most pressing problems has been largely unaddressed. True, there has been much talk about air pollution over the past several years, but very little action has been taken by the Hong Kong government, which on this issue is a prisoner of the very economic growth on the mainland that is supposed to ensure its future.

Beyond the health concerns associated with pollution, there are other problems gradually undermining Hong Kong’s competitiveness. The city’s rapidly aging population and shrinking birth rate are also major concerns. Government data for 2004 show a fertility rate of 0.93 child per couple, giving Hong Kong the second-lowest birth rate in the world, behind only its smaller neighbor, Macau. This rate is expected to improve slightly – to 0.95 – by 2008 and then plateau at around 0.99 in 2018 and beyond.

At the same time, research done by accounting firm CPA Australia projects that, by 2033, 24% of Hong Kong’s population will be older than 65, whereas that age group represents just 10% at present. And by 2033, those aged 55 and above will rise from 20% of the population to 38%.

Unspoken conclusion: at a time when Hong Kong will need to attract youth and professional talent from the outside more than ever before, the city may become an increasingly unpopular option for those it is so keen to welcome.

Hong Kong’s more geriatric future also has profound implications for the city’s budget and business-friendly low-tax regime. This year’s boom surprised even Financial Secretary Henry Tang – who, after years of deficits – had set a modest goal of a balanced budget. Now Tang finds himself with at least a US$1.2 billion surplus in the kitty and faces mounting calls for tax cuts, which he has dismissed as hasty and ill-advised.

The financial secretary is no doubt worried about how Hong Kong’s narrow revenue base, which depends on a tax system that requires billionaires to pay less than 20% of their income and is heavily reliant on land sales in a territory of only 1,100 square kilometers, can meet the city’s future financial needs.

When you do the math, it is clear that the current tax scheme will be stretched beyond the breaking point as the city ages and health-care costs rise in the heavily subsidized and heavily used public sector. As of now, public health care in Hong Kong is one of the best medical deals in the world; for example, emergency care is virtually free for Hong Kong residents once you discount the hospital entry fee of US$13.

Add to that the cost of reforming Hong Kong’s outdated, elitist educational system, which currently allows only a third of its students to go to university (in comparison with 80% for the United States and much of Europe), and then official anxiety, despite this year’s plump surplus, starts to make sense.

Most economists and officials concede the need to widen the tax base, and a sales tax is the option most frequently mentioned. But any additional tax – especially a regressive sales tax – is not popular among Hong Kong people, and with a chief-executive election coming up next March, the government clearly lacks the political will to enact any significant reform. (Witness the bevy of proposals for much-needed health-care reform that were just this month delegated to the back burner.)

This brings us to perhaps the most intractable of Hong Kong’s problems – its uniquely awkward (if evolving) political system. The catchphrase of the handover – “one country, two systems” – promised that Hong Kong would retain its treasured autonomy and rule of law. But, at least in its present state, the handover arrangement has turned into a recipe for political paralysis.

While the Basic Law, Hong Kong’s mini-constitution, promises full democracy to the city within 50 years of the 1997 handover, Beijing has shown no eagerness to implement this provision any time soon. What Hong Kong has instead is a 60-seat Legislative Council (Legco), half of whose members are directly elected, and a chief executive – currently the very popular Donald Tsang – who is a virtual appointment of the central government in Beijing. (An 800-member Election Committee actually “elects” the chief executive, but that committee is largely controlled by Beijing.)

Most of the legislators are affiliated with political parties, but the chief executive is barred by the constitution from any political affiliation. Although the pro-Beijing Democratic Alliance for the Betterment and Progress of Hong Kong (DAB) has become a reliable ally, otherwise the current arrangement has made Legco a permanent opposition to the central authority represented by the chief executive’s office and thus served to hinder, if not stall outright, important legislation and government projects.

Recent examples of the political standoff include the impasse over a proposal to create a West Kowloon cultural district, which Legco critics charge would simply be sweetheart deal for property developers disguised as a cultural project, and the prolonged wrangling over a plan to build new government offices on prime, harborfront land at a cost of about US$657 million.

The chief executive’s most stinging memory of what he regards as Legco intransigence, however, is surely the humiliating defeat in the council last December of a limited package of democratic reforms that he had personally championed.

Tsang’s predecessor, Tung Chee-hwa, was forced to withdraw national-security legislation that was clearly a priority for Beijing because of opposition in Legco, not to mention a 500,000-strong demonstration in the streets on July 1, 2003, the sixth anniversary of the handover. As it turned out, the failure of the National Security Bill was the beginning of the end for the deeply unpopular Tung, Hong Kong’s first post-colonial leader, who resigned his office under further pressure in March 2005.

Tsang, a much abler and more politically adroit chief executive than Tung, enjoys his current popularity (estimated at 70% by a recent University of Hong Kong poll) and has learned from the political bruising he suffered last December. He does not want to go through another rough-and-tumble in Legco over tax or health-care reforms ahead of next year’s election. And on Hong Kong’s most urgent problem – pollution – his hands are tied by the mainland.

Hong Kong, then, is currently going nowhere on major concerns that will have an important impact on its long-term competitiveness. Despite the pundits’ doom-laden prophecies for the city after the handover, however, Hong Kong’s continued pluck and vibrancy cannot be denied. The city has beaten back an economic crisis, SARS, bird flu and the political ineptitude of its first Chinese leader.

Hong Kong has a proven track record of reinventing itself. What makes the job harder this time is that, as the city scrambles for a new identity, the motherland – to whose future it is now forever wed – is undergoing its own massive transformation. As usual, with another handover anniversary just around the corner, Hong Kong does not know whether to celebrate, protest or both.

Kent Ewing is a teacher and writer at Hong Kong International School. He can be reached at