Hong Kong’s future lies in islands

Late last week, Xia Baolong told a gathering of Hong Kong’s elite that the city’s future leader had to prioritize fixing the housing market. He might have been motivated by an article that had appeared a few days before, making fun of the fact that the cost of a decent-sized flat here is what one could pay to live like an Italian duke. Or maybe he had been  troubled by an analyst predicting average prices for Hong Kong homes are set to rise another 10%-20% this year.

It is not likely he was bothered by the impact on housing prices of “real and painful” talk of Hongkongers leaving the city, because Hong Kong’s current leader, Chief Executive Carrie Lam, shrugged off that news a few days later, pointing out that there would be plenty of reasons for new arrivals to be happy with the state of affairs here.

Lam might have been a bit miffed that Xia had not been reading between the lines of her interviews with local media earlier in the week. She had said that fixing the city’s property woes is her top priority for the last year of her current term. She also hinted at running for another five years, indicating that her Policy Address in October will be “visionary”.

Critics pounced to say that her past failures are an indication of the likelihood of future success on property policy. Yet what this might be overlooking is that substance could make up for Lam’s style shortcomings this time, now that she has a National Security Law to back her up.

If – and this is a big if – Lam is able to lay out a long-term action plan for tackling housing affordability issues by listing some definitive targets, rather than regurgitating platitudes, there is a chance that minds can be changed and a new direction laid for Hong Kong’s future with some much-needed fixes in the property market.

Her critics might have also missed the hint about what this “visionary” speech could contain. For there is nothing more visionary that Lam might want to discuss than her Lantau Tomorrow Vision.

The Lantau Tomorrow Vision is inarguably bold. It involves the creation of several artificial island off the southeastern tip of Hong Kong’s largest island, where hundreds of thousands of new homes could be built to house millions of people. This community would be connected to the Greater Bay Area by high-speed railway, which would be extended from the current terminus as Kowloon West, and would reach the airport at Chek Lap Kok. (The current masterplan only mentions a possible rail connection, see map below, but the cat was let out of the bag by planners on the mainland side.)

Full map available at https://www.lantau.gov.hk/

It might be that Lam is feeling some pressure to get cracking on this plan. Hong Kong earlier this month entered its 25th year as an SAR, which means applicants for dirt-cheap 25-year mortgages must at least be thinking about a 2047 put option. There is also, as Xia intimated, a need to start deploying the NSL on bread-and-butter issues. Such as putting the property oligarchs in their patriotic place.

She has her work cut out for her, as a comparison with Shenzhen makes for embarrassing reading. The government of China’s second-most expensive city announced its projections for housing supply recently. This year it is expected to drop 100,000 units onto the market, neatly split 60/40 between commercial and subsidized homes. Hong Kong, by contrast, is expected to add just 7,800 units this year, a ten-year low.

That is just for purchase. Shenzhen is also bringing another 100,000 public rental units onto the market this year. Hong Kong compares slightly better in this category, but not much: There are 30,000 such units planned for delivery in 2021-2022.

To be fair, Shenzhen has around three times Hong Kong’s population, probably closer to 22 million. (Official statistics of 14 million do not account for residents from other cities or provinces living there without a local hukou.) Nevertheless, the neighboring city’s determination to fix its housing shortages has been driven by a similar realisation that rising inequality has – or had – been threatening its social fabric. It’s also why Shenzhen has been frantically building schools, with 146 new kindergartens, primary and secondary schools due to open this year.

It has taken Shenzhen five years to reach this milestone, after a crisis was ignited by skyrocketing housing prices in 2015, which prompted the city government to act. If only Hong Kong had been able to take the same aggressive approach over the same time period. It can only be imagined whether things might have turned out differently, even whether a National Security Law would have been necessary.

But in any case, all that should soon be water under the bridge now that Hong Kong has a similar overriding legislative framework as Shenzhen’s. The Land Resumption Ordinance gives the government all the power it needs to take back land (with compensation, of course) from developers who have been putting smaller and smaller apartments into the market for years, jacking up prices until they surpassed the Italian duke’s. The NSL merely gives the ordinance some additional, ahem, support.

It would be a brave developer today choosing to follow the example of SHKP’s deputy managing director, Mike Wong Chik-wing, who said, back in September, 2019:

“We have spent 30-40 years assembling these lands. The government should respect the Basic Law, which protects private property. The Lands Resumption Ordinance should be a last resort for the government to address the land supply issue.”

Lucky for him, however, and sadly for those who had been hoping for some quick building on readily available land, Lam has decided she no longer needs to go after the hoarders. She didn’t have to explicitly mention the Lantau Tomorrow Vision. She just ruled out the alternatives. First, she spat on the idea of a vacancy tax, meaning her previous determination to place a real cost on idle apartments and land will not be carried through. Second, she said it was unnecessary to convert existing land when new land could be found. All she needs to do, she said, is make her bureaucracy work better. And third, did she forget to mention that her Policy Address will be “visionary?

On its own, Lantau Tomorrow is not necessarily cause for concern. The project makes a lot of sense. It will allow the government to sidestep a potentially messy showdown with developers over their idle land; it will provide lots of new housing; and it will create jobs in the massive infrastructure buildout accompanying it. It will just take longer, and require hundreds of billions of dollars more, than wielding the NSL against the oligarchs.

There is a more pressing question to be asked, however, about what such a vision says about not only Hong Kong, but the GBA and China, as well. Are massive infrastructure projects going to continue to define the future for this city, region, and country? Or could money be better spent laying stronger foundations for the services sector, with projects designed to shore up consumer confidence?

Starting with a top-down view, China’s latest GDP figures released last week show cause for concern about consumer demand. Never mind parts of the data that apparently suggested a more “balanced” post-Covid recovery, with retail sales rising better than expected. Consumer confidence is not coming back from the Covid outbreak nearly as well as the government would like, which is clearly why the PBOC’s RRR cut came just before the release of the GDP numbers.

Now, whether one is a paid-up attendee of the Michael Pettis school of economic thought doesn’t matter. The national leadership has avowed its determination to change its economic priorities. It has acknowledged that China has done a great job building artificial islands and high-speed railways in its leading cities, but today it needs to focus on weaning its banks off their dependence on property and infrastructure, instead finding ways to stimulate innovation and drive consumption.

At a regional level, meanwhile, it is clear that for all the success of the past 40 years since the GBA was put in motion by Deng Xiaoping, it stands at a crossroads today. As the GBA’s most famous tech company has discovered the hard way, it’s not easy being successful when your biggest economic partner takes offense. Huawei’s challenges are not only its own; the GBA, more than anywhere else in the country, stands to lose heavily as US-China tech decoupling morphs into full-blown financial decoupling.

Yet the way to get out from this, as the Party itself has said, is through innovation, i.e., doing more with less. That should mean fewer wasteful projects that provide incremental economic gains at best. The GBA already has a world-leading railway network; it doesn’t need another intercity line running even faster than the current 300 km/h trains, which is what has been proposed for the Qianhai-Lantau leg of the new route. And yet Chinese media are awash in stories about the brilliance of the 600 km/h maglev trains being developed at the moment.

Then there is Hong Kong. To put it more bluntly, the Lantau Tomorrow Vision is a leaf from an increasingly outdated economic development playbook. There is plenty of land around Hong Kong that could be converted for residential use; Zhuhai and Zhongshan are within easy reach via the HZMB, offering cheap accommodation for Hongkongers who really need it; and the city’s immigration numbers could in the meantime be capped, just like Shenzhen is doing. Why would Hong Kong need to spend two-thirds of its fiscal reserves on dumping yet more sand into the sea?

Perhaps something might change between now and October. It will be important to see if Lantau Tomorrow is still Lam’s vision for the future – or whether property continues to be her top priority – if the US decides to escalate its efforts to encircle China with more serious financial sanctions in Hong Kong. But that is for another day.

Tell us what you think