Economic Issue Group Policy Recommendations

1
Economic Issue Group Policy Recommendations

• Revise the Land Policy
• To Reduce Costs of Business
• In order to Diversify the Economy
• Leading to an Innovation-driven Economy
• Part One
• Current situation of the land market and the
  economy
• Part Two
• Recommendations to become an innovation-driven
  economy

2
Part OneCurrent Situation

• All land are leased from the Government, it is a
  monopoly and supply would not increase with
  price.
• Monopoly would pass on to the property market if
  Government does not actively introduce
  competitive elements into the property market
  after sales.
• Currently, there are not enough competitive
  elements in the property market.

3
Observations that illustrated the lack of
competitive elements

• Market force cannot help to establish a standard
  on the computation of usable floor space.
• Market force cannot help to eliminate the unfair
  practice of internal sale.
• Public service companies that change, say bus
  depots to property developments do not need to
  submit the land to open competition.

4

• Revenue from land is a major source of Government
  revenue.
• Small/medium enterprises and middle class are
  supporting this revenue through rental and
  mortgage payment. A form of quasi-land tax.
• Property developers profit seems a form of tax
  collection charge.
• A non-competitive property market raised this
  quasi-land tax.
• It increases the costs of business (rental and
  salary).
• Not only a non-competitive market, but also an
  intervened market.
• In 2002, Government intervened the property
  market through nine specific measures.
• Property market price was not a fair market
  price.

5

• In more details, a pegged exchange rate system
  uses the whole domestic economy for adjustment.
• We have to inflate/deflate the economy as money
  supply increase/decrease.
• Nobel laurel Paul Samuelson explained this
  situation of Hong Kong in his book.

6

• Hong Kong went through this deflation adjustment
  during 1998 to 2004.
• Property vested interests lobbied the Government
  into intervention in 2002.
• Retail, labor and capital markets completed the
  deflation adjustment, but not the property
  market.
• Also caused a re-distribution of wealth from the
  deflated markets to the property market, further
  polarizing the rich and the poor.

7
2002 intervention
Without intervention market may adjust more,
reducing costs
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To sum up, HKs property price is

• not a competitive market price, and
• an intervened price
• Therefore, it is not a fair competitive price
• The competitiveness report of the World Economic
  Forum assigned a lower than overall ranking to
  HKs anti-monopoly sub-index(l2overall vs
  37sub-index)

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Part TwoRecommendations

• Harvard Professor, Michael Porter suggested that
  an innovation-driven economy is key to
  competitiveness. It needs
• A high level of business sophistication, and
• A high level of innovation
• The competitiveness report of the World Economic
  Forum put this sub-index lower than HKs overall
  ranking(12 overall vs 2lin this sub-index)?
• We believe that the unfair price of property
  discussed above is one of the hindering factors
  in expanding our business sophistication and
  innovation.

10

• Since property and salary (staff need to pay
  mortgage) expenses are key expenses of
  small/medium enterprises. We recommend
  developing a fair competitive market price for
  the property in order to facilitate the
  development of innovative small/medium
  enterprises. These include
• Small/medium computer software development
  services.
• Small/medium design and quality control
  enterprises.
• Small/medium finance, accounting and legal
  services.
• Small/medium logistics and international trade
  services.
• Small/medium human resources and training
  services.
• Small/medium market research and promotion
  services.
• Commercialization of research projects of
  universities.

11

• To develop a fair competitive market price for
  the property. The Government needs to
• Increase land supply.
• Increase the number of participants.
• Eliminate market manipulations.
• That is to drop the high land price policy,
  reducing the quasi land tax of the people. This
  may reduce land revenue of the Government.
• Therefore, tax reform is needed. We recommend
  including Property Capital Gain Tax into the tax
  reform consultation.

12

• In conclusion, our policy recommendations are
• Revise land policy and drop the high land price
  approach in order to reduce the quasi land tax.
• Leading to a reduction in costs of business and
  expanding business sophistication through
  promotion of small/medium enterprises.
• Small/medium enterprises can increase the
  diversification and innovation of HK leading us
  into an innovation-driven economy.