Hong Kong budget in focus

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By Craig Stephen

HONG KONG (MarketWatch) — Hong Kong’s Financial Secretary will present next year’s budget on Wednesday and is expected to reveal another bumper budget surplus. But this cash pile is likely to be viewed as an embarrassment of riches rather than evidence of good housekeeping.

This unplanned surplus is estimated at around HK$60 billion ($7.7 billion) to $80 billion. Meanwhile, the Exchange Fund that contains all Hong Kong’s accumulated fiscal savings and investment earnings now tops in excess of HK$1.26 trillion.

The problem for the Hong Kong government is it may be getting richer, but many of its citizens complain they are feeling poorer. Rising inflation, a pegged currency that has rapidly lost its purchasing power, widening income inequality and some of the highest property prices in the world all add up to a feel-bad factor.

These issues are perhaps not new, but are put sharply into focus by current flashpoints around the world over not dissimilar complaints. And Hong Kong also has an unelected administration that is criticized for increasingly being seen to govern for the interests of big business.

One recurring bone of contention is over what to do with this growing fiscal surplus. Popular requests are for the government to get serious tackling Hong Kong’s pollution problem or to just return monies to taxpayers. But the government seems resigned to sit on these reserves, apart from spending on China-related transport infrastructure projects.

New transport links are justified to support Hong Kong’s pre-eminent position in the Pearl River Delta. Today, that seems more than anything, to mean shoring up its position as a duty-free shopping Mecca for mainland tourists.

Hong Kong’s retail and tourism sectors have had a bonanza on the back of surging mainland visitors. Retail sales rose by 41.9% on 3-month annualized trend in the fourth quarter of 2010, up from 23.1% in the third quarter. In 2010, tourist numbers grew 21.8% to 36 million, supported by the weaker Hong Kong dollar. Some 63% of these visitors were from China, according to data cited by Macquarie Equities.

The attraction for mainland tourists is Hong Kong offers a convenient tax-free shopping trip for watches, jewelry and high-end brands. Moreover, they now come armed with a currency which has risen by 20% against the Hong Kong dollar since 2007. In fact, so prolific are the big spending mainland shoppers, a friend recently complained shop assistants now shun you if they hear Cantonese, rather than Putonghua being spoken.

Shopping by mainland tourists now also extends to buying Hong Kong property. Last year some figures suggested mainlanders were buying at least 35% of new residential sales.

But is this growth at the expense of Hong Kong? There have been complaints that sales to mainland buyers help push property prices beyond the reach of locals. This is not a unique problem to Hong Kong. Last week authorities in Beijing announced home purchases there would be restricted to domestic residents or to those who have paid tax for five years. When a similar policy was mooted in Hong Kong it was dismissed as an affront to free market principles.

Another issue is whether Hong Kong is getting a fair return for this focus on tax-free shopping tourism as a pillar of the economy. How long would it take for China to set up its own duty-free centre?

A related issue is the amount of money being spent on various infrastructure links bringing Hong Kong closer into the southern China Delta. Here, the government appears to have a limitless budget.

Hong Kong has already had controversy over plans to build a new 26-kilometre, HK$66.9 billion high-speed railway link between Hong Kong and Guangzhou. Some also question the value in a bridge to Macau. Last week it was announced the government is set to green light a new 17-kilometer cross-harbor link from satellite town Shatin in the New Territories to Central, costing $60 billion.

These links help whisk mainland visitors directly into congested downtown Central Hong Kong and more shopping. But the gains for Hong Kong residents who are paying for this infrastructure are less clear. The weakening of the dollar versus the yuan also makes reciprocal trips over the border less popular.

It is widely expected that to counter some of the pains from rising prices there will be a few giveaway sweeteners in the budget. But that looks like a sticker plaster on this myriad of underlying tensions. As Hong Kong gets more closely integrated with China, it appears increasingly less on equal terms. One way forward here would be to hurry up and peg the Hong Kong dollar to the yuan.

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