Antony Leung, who loves fast cars and enjoys the company of Chinese diving queen Fu Mingxia, who’s less than half his age, is one Hong Kong financial secretary that the local paparazzi dare not ignore. But investors find that the 50-year-old Leung bears watching as well. They’re worried that Hong Kong’s legacy as one of the world’s freest economies may not be safe in his hands.
Leung’s qualifications aren’t at issue: Articulate and market-savvy, he was previously Asia-Pacific chairman of J.P. Morgan Chase & Co. and, before that, a longtime Citicorp executive. Last May, when Leung took over as financial secretary , essentially, Hong Kong’s economy czar , he was viewed as the ideal candidate to restore direction to an economy that had strayed from its time-honored laissez-faire philosophy. But confusion now swirls around where he stands on the role of government, largely because of his March 6 budget address to the Legislative Council.
Leung said government’s economic mission should be to invest in “projects beneficial to our economy as a whole when the private sector is not ready to invest in them.” He summed this up as “proactive market enabling,” but to some listeners it sounded a lot like a prescription for betting taxpayer money on shaky business projects.
Certainly, it seemed a world apart from the “positive noninterventionism” practiced by Leung’s predecessors. That philosophy, dating to the 1960s, emphasized limits to government and undergirded Hong Kong’s stunning economic success.
Over the years Hong Kong softened its strict laissez-faire stance, introducing welfare, bailing out bad banks and splurging on a new airport. Yet financial secretaries continued to harp on limits, protesting whenever they did intervene in the economy that their hand was being forced by exceptional circumstances.
By contrast, Leung’s proactive market-enabling philosophy, framed within a can-do spirit, is fueling expectations of greater public sector involvement in the economy. And this makes many Hong Kong residents uneasy. In an editorial on the budget address, the Hong Kong Economic Journal, a well-regarded Chinese-language daily, fired off a warning that “government isn,t God.”
Leung, in an interview with Institutional Investor, denies strenuously that he has any intention of playing God and points out that over the years Hong Kong has had its share of taxpayer-backed projects, such as subways.
The sorry fact is that, for the interventionist-inclined politician, temptations abound in Hong Kong today. The city has lost some of its shine after decades of prosperity. When Hong Kong Chief Executive Tung Chee Hwa, who was appointed by Beijing to run the British colony, took office in 1997, per capita GDP was $26,154. The forecast for 2002 is $23,688, a decline of 9.4 percent. As in Singapore (see Singapore, page 66), investment, along with jobs, has migrated to the increasingly competitive manufacturing cities of mainland China.
Under such pressures, perhaps Leung’s toughest challenge is to resist not merely his own impulse to intervene but also Tung,s. A former shipping tycoon, Tung has tried many remedies to cure the economy. His heavy-handed intervention, however, has created confusing policies, budget deficits and dubious projects, say critics.
The most notable debacle: Cyberport, meant to be Hong Kong,s Silicon Valley. In 1999 Tung granted Richard Li, a son of powerful property magnate Li Ka-shing, government land on the south side of Hong Kong island to build an industrial park for the government and luxury housing for Li to sell. But Cyberport is having trouble attracting tenants, and Hong Kong is no closer to having a Silicon Valley. Li, however, is doing just fine.
With the exception of the chief executive and some part-time advisers, Hong Kong’s entire administration is made up of career civil servants. That makes Leung a rare outsider.
The son of a waiter, Leung was drawn to Chinese Communism in its more radical phase , though he says he never joined the Communist Party , during his student days at the University of Hong Kong. Even today he proudly acknowledges that he can recite the teachings of Mao Tse-tung, although he declines to do so. But after earning a bachelor’s degree in social sciences in 1973, Leung pragmatically joined Citibank, where he made his mark as a trader in that most brazenly capitalistic of institutions, the foreign exchange market.
Leung recently discussed his plans for Hong Kong’s economy with Contributor Jesse Wong at his office in Hong Kong.
Institutional Investor: Some say that the positive noninterventionism policy caused problems for Hong Kong, such as an overdependence on the property sector. Is that one reason you,re moving away from it?
Leung: Positive noninterventionism is one of those labels that has been used and sometimes overused and that has mutated. The property sector was overvalued largely because of government intervention, because of the government’s restriction on land sales. So we used the nonintervention label, but look at what actually happened. It’s now high time to more accurately describe what the government should do rather than rely on the old label.
What is your agenda?
I would like to enable the market a lot more, hopefully by reducing the government’s involvement in a lot of activities, and also reduce bureaucracy and regulatory costs.
How would you reduce the government’s role?
First, I have announced, with actions backing it up, that I would like to reduce public sector expenditure from 23 percent of GDP to 20 percent in five years. Second, as I said, I intend to reduce bureaucracy and regulatory costs. Also, we would like to work with private sector firms to see how we in government can provide better services through such things as outsourcing and corporatization and privatization. Hopefully, that will give people a clue as to my fundamental belief of the role of the government, and that is to actually retract our hands.
Can you give an example?
Right now the government is providing 97 percent of the hospital care for Hong Kong. People are not really complaining, but financially it is not really sustainable. Also, over half of our people are living in subsidized housing. The fact that we have a big budget deficit means we have to change.
Proactive market enabling isn,t just about cutting back the public sector, though. What do you most want to enable?
The market. The market. This isn,t about enabling a particular firm or an industry. I,m enabling the market. Read my lips.
You,ve talked about the government investing in projects the private sector wouldn,t touch. Is that enabling the market?
Look at the Mass Transit Railway Corp. The MTR is a venture that has benefited the entire economy, and unless the government supported it, our roads would be very congested. Guess what? Now the MTR is a publicly listed company. At a particular time, the private sector may not be able to provide backing for a project like that that would benefit the entire economy, so the government would consider promoting it.
How else might you enable the market?
Another very illustrative example is that even though we,re suffering from a very large budget deficit, we,ve chosen to contain the expansion of growth rather than impose a lot of new taxes. I believe that a high-tax regime would not enable the market.
Then is the government less likely to impose a goods and services tax now that you,re financial secretary?
Less likely, especially in today’s economic environment. Our tax base is very narrow. Fewer than 10,000 people in Hong Kong pay the standard rate of salary tax of 15 percent. It’s a very narrow tax base, and it obviously creates all kinds of problems. On the other hand, the economy is not doing well, and unemployment is still at a record high. This is clearly not the time to introduce a regressive tax, and a consumption tax is by definition regressive. Besides, because of deflation, income distribution has been getting more and more uneven. I do believe, though, that at some point we should broaden the tax base. But whether a consumption tax is the only mechanism is something we can study.
Singapore is thinking of shifting away from its version of proactive market enabling and more toward Hong Kong,s traditional hands-off model. Doesn,t it seem strange that Hong Kong, meanwhile, would be simultaneously shifting toward the Singapore model?
We,re all reacting with the change of time. They were at one extreme. We were at the other extreme, maybe. And maybe we,re all seeing the same position that we should be in. Interestingly enough, they have been very involved in the economy, and yet they have sometimes been rated as a very free economy. Maybe the analysts should rethink these labels.
How do you respond to investors who worry that proactive market enabling is a slippery slope that will lead to more Cyberports?
The strongest demonstration of my belief in the need to actually reduce the size of public sector expenditure is that I have resisted the temptation to impose much higher taxes. And we,re taking moves to reduce bureaucratic and regulatory costs by reprioritizing, reorganizing, reengineering and working very closely with the private sector to outsource, corporatize and privatize. I would wish the international business community and investors to look at all these very concrete and very major actions.
The economist Milton Friedman used Hong Kong literally as a textbook example of an extremely free market. Now it sounds as if that is an extreme you,d like to move away from. What would you like Hong Kong to be known for?
Milton Friedman wrote his book quite a long time ago, and since then things have changed. Obviously, I,m not trying to return Hong Kong to the 1980s, because times have changed. The entire world has moved from an industrial economy to a knowledge economy, and, most strikingly, China has reemerged from a centrally planned economy to what they call a socialist market economy but is, nevertheless, a very open economy. All these changes have happened, and Hong Kong has to respond. I,m doing that and at the same time trying to make sure Hong Kong remains the freest economy in the world.
A lot of people see Shanghai as a strong competitor with Hong Kong. Should you be worried?
I would like to remind your readers that Asia , and I choose the word Asia deliberately, not just China , is a large enough market for at least two financial centers, Hong Kong and Shanghai. But in the near to medium term, Hong Kong still possesses a number of advantages that Shanghai may not have. The most notable one is that international investors are more accustomed to Hong Kong’s legal system, rule of law, regulatory environment and our low and simple tax regime.
