For years, Hong Kong had the richest property market in the world. Residential and commercial prices were so high that the city authorities imposed taxes and fees designed to discourage buying, reduce demand, and create a more affordable environment.
Though the high costs imposed hardship, they were also a sign that the city was a very attractive place to live and do business. Even after Beijing took sovereignty over the city from Great Britain in 1997, those attractions remained, impelling foreign multinationals to establish offices in the city and individuals to set up housekeeping there to be near the business.
But when, in 2020, Beijing shattered the pro-business legal system that Britain had left, those attractions began to disappear and did so quickly. Foreign firms relocated out of Hong Kong, as did many talented people. Property values tumbled, effectively announcing the demise of the city’s attractions and its use to China.
Beijing’s 2020 move was not its first attempt (no doubt inadvertent) to wipe out the city’s attractions. In 2003, China tried to interfere with the legal protections for individuals and business contracts that had made this “special administrative region” such an attractive place to work and do business. Mass protests at the time forced the authorities in Beijing to back down.
Though there were mass protests in 2020, Beijing did not back down. It had written a national security law (NSL) and forced the matter, with considerable police and military force as it turned out. With that law in place, the legal protections for contracts and individuals ended. Businesses started leaving Hong Kong almost immediately.
The effects have been overwhelming. According to the Hong Kong Census and Statistics Department, some 700,000 Chinese have left the city since the NSL went into effect. Foreign residents have also departed, but more telling is how global banks, shipping companies, and other businesses have also departed for more accommodating locations. Big names, such as Goldman Sachs and JP Morgan, have moved assets and personnel to other Asian locations, mainly Singapore.
Jon Hartley of Canada’s prestigious MacDonald-Laurier Institute estimates that the city’s income per capita today is some 10 percent less than it would have been had Beijing not made its 2020 change, even considering the effects of the COVID-19 pandemic and Beijing’s ill-fated zero-COVID measures that so delayed China’s recovery.
To be sure, the general slowdown in China’s overall pace of economic growth has played a role in this collapse since one of Hong Kong’s other attractions was proximity to what was a rapidly growing economy. High interest rates have also played a role since Hong Kong’s dollar peg forces the authorities there to follow the U.S. Federal Reserve rate hikes instead of the rate cuts of the People’s Bank of China. But neither of these considerations can account for the dramatic losses recounted above. Businesses could easily wait for a change in interest rate policies and a pickup in China’s economy. They have in the past. The cause is the NSL and how it fundamentally changed the business environment in Hong Kong.
To stem the pace of property price declines, Hong Kong authorities have reversed the laws put in place more than a decade ago to hold back price increases. The 15 percent stamp duty on nonpermanent residents is now gone, as is the 7.5 percent duty on existing homeowners. The city has also rescinded a flip tax on the resale of property in less than two years. Visa rules have also been eased to encourage the in-migration of talent. Though it is only reasonable for the Hong Kong authorities to make such changes, and they may slow the pace of value erosion, they also signal a panic of a sort.
In the end, nothing at the city’s disposal can change the underlying problem: the NSL. And to make matters worse, Beijing is pressing a still more stringent security law—titled Article 23—on Hong Kong. This new law, though ostensibly aimed only at foreign agents, has so far prosecuted only Chinese nationals. If it were not already clear, the city’s once attractive legal protections for contracts and individuals are long gone. No doubt Singapore delights in this circumstance. It is getting much of the business, talent, and wealth now bleeding out of Hong Kong.
In the meantime, the authorities in Beijing seem either unaware or unconcerned that they are killing the goose that once regularly laid golden eggs for China.
