The China Thread

[Monoriu]

Wasn't it just a page or two back Mono saying this would never happen?

What are you referring to?

[Monoriu]

https://www.reuters.com/article/us-hongkong-economy/hong-kong-dropped-from-economic-freedom-index-as-policies-controlled-from-beijing-idUSKBN2AW0OI

Hong Kong dropped from Economic Freedom Index as policies 'controlled from Beijing'

HONG KONG (Reuters) - Hong Kong has been excluded from the Heritage Foundation's Index of Economic Freedom because its economic policies are controlled from Beijing, the Washington-based think tank said, removing Hong Kong from a list it topped for 25 years up to 2019.

The title of the world's freest economy for 2021 was retained by Singapore for the second year, the Heritage Foundation said, with Hong Kong's investment freedom hurt by political and social unrest dating back to 2019.

In the 2021 index published on Thursday, the foundation said Hong Kong and Macau, both special administrative regions of China, were no longer included because even though citizens enjoy more economic freedom than the average resident of China, "developments in recent years have demonstrated unambiguously that those policies are ultimately controlled from Beijing".

Developments in Hong Kong or Macau that are relevant to economic freedom would be considered in the context of China's evaluation in the index, it added. China slipped to 107 from 103, among the list of 178 countries.

A spokesman for the Hong Kong government's financial secretary expressed "deep disappointment" at the decision.

"The decision is neither warranted nor justified. It does not do justice to (Hong Kong)," the spokesman said, adding that the claim that the city's economic policies are controlled by Beijing is "ill-conceived and simply not true".

He added that the assessment was "politically biased" and that Hong Kong's core economic competitiveness, including free flow of capital, remains under the "one country, two systems" formula of governance put in place in 1997 when the city reverted from British to Chinese rule.

The U.S. suspended Hong Kong's preferential tariff rates for exports to the country and imposed sanctions on Hong Kong and Beijing officials last year in response to China's imposition of a national security law on the former British colony, saying it undermined the city's high autonomy.

Critics of the law say it is aimed at crushing dissent, while authorities in Beijing and Hong Kong say it was necessary to restore stability after anti-government and anti-China unrest.

Earlier this week, London-based non-governmental organisation Hong Kong Watch said in a report that "red capital" - money originating from mainland China - had fundamentally shaped Hong Kong's politics, media and the city's status as a business hub.

In 2019, 82% of IPOs in Hong Kong were by mainland companies, while in October 2020, mainland equities comprised 57.3% of the Hang Seng Index by weighting, the group said.

Big deal.  A small dent in our PR efforts.  This is Hong Kong.  For as long as I remember, there is a crisis every few years.  The Sino-British talks in the early 80s.  Tiananmen in 1989.  The huge brain drain in the early 90s (I was one of them).  The handover and Asian financial crisis in 1997.  SARS and the anti-Article 23 protests in 2003.  The financial crisis of 2007/08.  The anti-patriot education protests of 2012.  The umbrella riots in 2014.  The Mongkok riot in 2016.  The black riots of 2019/20.  Hong Kong's death is predicted every time, and we are still here.

The real question is who will benefit from the prosperity.  The Cantonese-speaking locals who are born here?  Or the rich, well-connected, Mandarin speaking, Ivy-league educated second or third generation red princes from the Mainland?  I think the question has been settled with the victory of the government over the rioters

[Valmy]

Who was projecting immediate collapse of Hong Kong? Nobody. We have just been warning about thr long term consequences.

[grumbler]

The victory of China over Hong Kong is why HK is being dropped from the index.

[Monoriu]

I see it as a victory of markets over politics. 

Say the real estate tycoons have a flat to sell.  There are two buyers.  A Mainland red prince with US$10 million in cash in a suitcase.  A Hong Kong 20-something middle class making US$2k a month. The red prince will out bid the local every time, and the local will have no choice but to live in a 50 square feet subdivided flat.  The local wants a democratically elected government who will ban the red prince from the real estate market, so that the tycoon will have to sell to the local at a reduced profit.  That plan has now failed. 

[The Minsky Moment]

I see it as a victory of corrupt crony politics over markets.

Say the real estate tycoons have a flat to sell.  There are two buyers.  A Mainland red prince and a local without clout in Beijing.  It doesn't matter what the red prince bids because the tycoons now believe that the courts can't be counted on to rule fairly and will favor the side with more pull in Beijing and so they will give the flat to the red prince to be safe. The local wants a democratically elected government that will safeguard the rule of law in Hong Kong and stand up for the concept of One Country, Two Systems. That plan has now failed because Xi is building a corrupt neo-Maoist regime and there is no more room for Dengist flirtations with pluralism and experimentation. Hong Kong must be reduced to a province like any other.

[Monoriu]

I see it as a victory of corrupt crony politics over markets.

Say the real estate tycoons have a flat to sell.  There are two buyers.  A Mainland red prince and a local without clout in Beijing.  It doesn't matter what the red prince bids because the tycoons now believe that the courts can't be counted on to rule fairly and will favor the side with more pull in Beijing and so they will give the flat to the red prince to be safe. The local wants a democratically elected government that will safeguard the rule of law in Hong Kong and stand up for the concept of One Country, Two Systems. That plan has now failed because Xi is building a corrupt neo-Maoist regime and there is no more room for Dengist flirtations with pluralism and experimentation. Hong Kong must be reduced to a province like any other.

If that's really what's happening, HK real estate should be cheap.  It isn't.  HK flats are *the* most expensive in the world.  The red princes are bidding and paying. 

[Jacob]

If that's really what's happening, HK real estate should be cheap.  It isn't.  HK flats are *the* most expensive in the world.  The red princes are bidding and paying.

That doesn't follow. Corrupt crony politics are more than capable of sustaining bubbles.

[Admiral Yi]

That doesn't follow. Corrupt crony politics are more than capable of sustaining bubbles.

It does follow Joan's description of the market being determined by influence on the buy side.

[Monoriu]

If that's really what's happening, HK real estate should be cheap.  It isn't.  HK flats are *the* most expensive in the world.  The red princes are bidding and paying.

That doesn't follow. Corrupt crony politics are more than capable of sustaining bubbles.

If what Minsky describes is happening, the red princes don't have to bid.  The tycoons will just give the flats to them, or sell the flats at below market prices to earn their favour.  That's not what's happening.  The tycoons are trying to maximise profits by selling to the highest bidder.  The red princes still have to buy the flats at astronomical prices.  In other words, the market dictates prices, not political clout. 

[Jacob]

That doesn't follow. Corrupt crony politics are more than capable of sustaining bubbles.

It does follow Joan's description of the market being determined by influence on the buy side.

Correction accepted.

We'll see how long the state of affairs last.

[The Minsky Moment]

That doesn't follow. Corrupt crony politics are more than capable of sustaining bubbles.

It does follow Joan's description of the market being determined by influence on the buy side.

It doesn't have to result in prices declining if the sellers are smart and curry influence by supporting the right political line and giving the mainland "princes" first access to listings, desirable club memberships etc.  The princes as a class don't want to see prices decline because that is where they are putting a chunk of their wealth. Corruption is a dynamic game and there are lots of ways to play if you have money and status but are willing to lose a scruple or two.  But the regular folk almost always get the short end.

[Admiral Yi]

It doesn't have to result in prices declining if the sellers are smart and curry influence by supporting the right political line and giving the mainland "princes" first access to listings, desirable club memberships etc.  The princes as a class don't want to see prices decline because that is where they are putting a chunk of their wealth. Corruption is a dynamic game and there are lots of ways to play if you have money and status but are willing to lose a scruple or two.  But the regular folk almost always get the short end.

This is a different narrative than you one in which you said it doesn't matter what the red prince bids.

[The Minsky Moment]

I can add more nuance in response to a critique.

[The Minsky Moment]

The larger point is that the subversion of rule of law cannot credibly be characterized as a victory of markets over "politics".  I'm not a big fan of Heritage overall, but they have recognized the basic truth that the foundation of economic freedom is not low capital gains taxes or even sliced up red tape, but the security that a reliable system of impartial justice provides to investors and contracting parties.  Hong Kong had it, now it doesn't, and recovering virtue once lost is even more challenging than maintaining it.