Tan established a string of off-the-peg companies with such names as "Smart Money" and "Eager Earnings" to borrow large and ultimately unrecoverable sums. To the end, which came in October , Tan was highly regarded by blue-chip banks and investment advisers in Hong Kong and London. The legal case against him lasted thirteen years and was only closed in , at immense cost to the Hong Kong taxpayers. In the downturn of the early s, a number of smaller banks also got into trouble, usually from combinations of incompetence and fraud. Between June and March , the government was obliged to take no less than four such banks into some form of public custody.
As a result, a major program of financial regulation was initiated. This was partly to avoid recurrences and partly, by then, to provide a system capable of withstanding shocks in the reversion process and insulation from the kinds of commercial malpractice rampant across the border. Unfortunately this process has not been followed up with the vigor required. In April , after publication of an extensive review of the financial and currency markets, the Financial Secretary said that "fine tuning" was all that was needed to improve them South China Morning Post , April 24, But the downturn of revealed new problems in both regulation and the working of the peg.
Three brokerages have gone into default, as has Peregrine Investment Holdings, one of Hong Kong's most prestigious investment houses. Although triggered by the Asian downturn, early warnings of these problems were available.
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Peregrine itself had recently been nominated by the Hong Kong Securities and Futures Commission as one of two companies to represent the territory in a survey of futures market practices undertaken by the Bank of International Settlements. The BIS subsequently reported that both companies fell "far short of key guidelines" and were only making satisfactory disclosures under 2 of 85 possible headings South China Morning Post , November 10, Further, in May, , the chairman of the Securities and Futures Commission, Anthony Neoh, described the Hong Kong Stock Exchange as "a private club" that was failing "to adequately supervise its broker members.
In thinking about this problem one must bear in mind that Hong Kong has only relatively recently emerged from the world of Chinese money shops--a world where loans are made by informal word-of-mouth and where family and business money cannot be meaningfully distinguished.
The modernization of this world is well underway, but the impression given by glass skyscrapers and glossy computerization is a misleading indicator of how near to completion the process really is. The First Year of the New System If one looks at the political response to these problems, it is clear that within the constraints of current arrangements both the Chief Executive, Tung Chee-hwa, and the Chief Secretary, Anson Chan, have emerged from the year with credit. The Chief Secretary has played a crucial role in post-colonial continuity.
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This has been buttressed not only by her experience and ability, but also by the stature she gained in declining Beijing's invitation to take a premature "loyalty oath" to the Provisional Legislature. Instead, Mrs. Chan remained true to the old order until it was appropriate to transfer her allegiance to the new.
Meanwhile Mr. Tung, battered by a politician's worst enemy--the unexpected--and hampered by colonial legacies, has shown real strengths. Although quite inexperienced in any form of popular politics, he has represented Hong Kong effectively abroad and begun some important initiatives at home. Performance by officials in the economic sphere has been more problematic.
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Response to the Asian crisis and its domestic economic repercussions has been slow, failed until quite late to take account of the speculators' double play on Hang Seng Index futures and the currency, and appears to have paid too little attention to the regulatory defects that are emerging. There have also been moments of extreme political insensitivity and a failure to begin to fully rethink old economic ideologies. In the budgets of and , before the turnover, the Financial Secretary, Sir Donald Tsang, was confident and optimistic.
In mid, worried about the economy overheating, he said "I expect much more money flowing [in] than we might be able to handle," and he dismissed as "ridiculous" mainland Zhou Nan's anxieties about Hong Kong's social spending budget commitments South China Morning Post , June 30, Some analysts were immediately concerned, noting the downturn in tourism, the completion of the airport, and the poor trends in both exports and re-exports.
In March of this year, Mr. Joseph Yam, Head of the Hong Kong Monetary Authority, gave gung-ho speeches to meetings of bankers and analysts in Tokyo and London at which he blamed asset deflation on previous "irrational exuberance" and said that markets were working well. He concluded: "that is why the Hong Kong economy is not expected to be seriously affected by the [Asian] turmoil. Four days later the government admitted there was a downturn, and the July data confirmed what was already all too visible to everyone else.
The economy is shrinking, unemployment is a serious issue, and asset and currency markets continue to weaken. On August 14, , the Hong Kong Government entered the share market in an attempt to frustrate speculators making the double play with August futures, and on September 5, new measures were announced in an effort to control and make more transparent any speculative activity.
Yam's only comment was, "I don't think I would have time to meet him. How do Hong Kong's capabilities match up to the tasks ahead? First, it is important to emphasize how difficult any transition of this kind is bound to be. No post colonial transition has been easy, even though this particular transition was planned far ahead and by parties of high sophistication. The intrinsic problems to be addressed in creating a form of government that is both effective and socially acceptable have simply not been appreciated, particularly by those not directly involved.
Given the shocks of the past year, it is remarkable that the system has survived as well as it has. Nonetheless, we need to look hard at this experience to take a sensible view of the future. Let me start by enumerating the crucial problems that lie ahead, together with their social and political implications, and then relate these to the machinery and ethos of government in contemporary Hong Kong.
The principal problems for economic strategy are, first, to resolve policies for the peg and to define government's role in relation to share and property markets and, second, to work out thinking for the long-term shape of the economy.
The peg poses the immediate problem of how can real costs be brought down without devaluation. No magic productivity formulae are going to solve this, and with a fixed peg and declining inflation, the process is now underway in the only form possible: attempted and imposed direct wage cuts in the private sector. This has already been shown to be immensely unpopular and divisive, partly because public sector sacrifices have been relatively modest and inequalities were in many cases high to start with.
On the other hand, to abandon the peg would have serious costs for the financial services sector and for the real incomes of those in the public sector. This is an old colonial dilemma. British civil servants kept India on the gold standard to preserve the value of their pensions, thereby denying Indian industry a chance to compete against Japan and the silver standard economies in the late nineteenth century. In Hong Kong today, the issue still pits the interests of the employed against the unemployed, the public against the private sectors, and the financial against the manufacturing and tourism sectors.
The peg is also linked to the property market, although this is a problem that has been maturing for twenty years. High property prices in Hong Kong are no accident. They are the mechanism by which a regional metropolitan city asserts its specialization, forcing out lower productivity activities, including all but the highest technology manufacturing.
The growth of the property development industry and rising government dependence on property-related revenues are natural consequences of this.
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In Hong Kong, this link has been reinforced by two unusual features of the territory: Crown, now Special Administrative Region, ownership of all freehold, and the large potential for land reclamation from the sea. These factors together are a license to print money. Under the colonial system, market forces were softened by the provision of public housing and active land policies for industry. But these policies also have their problems, and the tension between narrow and broader concepts of economic efficiency and the conflict between these and social need is great.
The challenge is to escape from the current crisis in a way that secures some balance between the demands of developers, government revenue and, in the private sector, of owners, near-owners, and those with no hope of ever owning a roof over their heads. Those with no hope include the 10, people who live in cages, single people now waiting 13 years for public housing, and recent migrants. Finally, there is the issue of government intervention in the market for land and property. And, since the August decision to intervene to frustrate the double play, there is now also the new issue of government intervention in the stock market.
August's intervention resulted in the government holding up to 15 percent of the value of the Hong Kong stock market, with what might be regarded as major positions in banking and property companies. These positions are technically large enough for it to seek control and justify a place on their boards.
Such a situation is bound to create serious conflicts of interest when the government sets land, tax, and other policies. In addition there is the problem of intervention in industry and technology policy. In the early s, the Hong Kong government consciously rejected calls to guide firms in any way or to provide the financial and institutional infrastructure that would have been required to up-grade domestic industries. For a decade, the opportunities created by the accelerating reform movement in China provided an economic alternative to such processes. Now, however, the limitations of low-technology based regional specialization are becoming clearer, and Hong Kong is falling ever further behind Taiwan, Singapore, and other Asian economies in technological capabilities.
Voices in favor of upgrading on the basis of government-guided research and development are again beginning to be heard. These include Dr. Chung an Executive Council member and a veteran of Hong Kong's higher education expansion ; some Democratic and Liberal politicians; and in academia, Professor Charles Kao and local heads of universities.
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Interestingly, pro-Beijing figures are also critical of the colonial government's failure to support industry and appear to be gaining ground. The current government has committed itself to support the first Report of the Innovation and Technology Commission published in September Can the Hong Kong system be expected to cope with these complex technical and politically charged issues?
In my view, only with great difficulty. There are three aspects of government that need to be considered in this context. These are basic structure, ideology, and non-governmental intellectual resources. Basic Government Structure By basic structure, I refer to the roles of executive, legislature, and civil service. The core of the early postwar system was the governor, whose powers were largely exercised with the advice of the Executive Council Exco , essentially a cabinet made up of the most senior government officials and a small group of important local citizens.
Below Exco was the Legislative Council Legco , on which served a somewhat more representative group of local members, both Chinese and expatriate. The key functions of Legco were to debate and pass the annual budget legislation in the spring and to hear and debate the governor's annual policy address in the autumn.
Key Exco members also served on Legco, where they acted as intermediaries between the two bodies. The acceptability of this system rested on public acquiescence in Britain's role in Hong Kong and on the pragmatic balance of benefits and disadvantages experienced by the population as a whole. In the s and s, the benefits consisted mainly of public order and the legal framework needed to make a living.
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