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Hong Kong junks laissez faire
January 26, 1999
By Edward Neilan
Special to World Tribune.com
TOKYO--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 late
China boss Deng Xiaoping the last time they met.
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 ashore at a Wanchai Suzie Wong bar, 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.
The fact of Brazil 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.
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$145 billion, the world's largest.
Hong Kong's $88 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 has only begun 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's old Orient Overseas Shipping Co. When things went wrong at
Orient, Tung called on banks around the world who 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 Chairma of Toyota Mtor Corp.
Shoichiro Toyoda and chairman ofte Bank of Tokyo-Mitsubishi Ltd. Tasuku
Takagaki.
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.
Edward Neilan (eneilan@crisscross.com) is a veteran journalist, based in Tokyo, who covers East Asia and writes weekly for World Tribune.com.
January 26, 1999
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