Thursday, July 21, 2005

Hong Kong's Cycles of Creative Destruction

Why has Hong Kong not preserved its historic monuments? It is said that unbridled capitalism is simply the process of creative destruction, a form of economic natural selection, the survival of the fittest companies and ideas. In Hong Kong we have a city that is dominated by, and obsessed with property - not just today, but since its early beginnings, when the early Colonials debated how to set up shop on an island that had virtually no flat land.

If property is so valuable, though, why are heritage sites and even not-so-old buildings constantly being torn down? Why must we Hong Kongers endure the incessant sound of the jackhammer, almost Pavlovian in conditioning us to accept change as a fact of life? The answer - ownership is limited, forcing this city of immigrants to try to maximize their returns on this valuable asset as quickly and efficiently as possible. I would argue that around this basic fact of life in Hong Kong, an entire ethos has been created.

Property on Palmerston's 'Barren Rock' was clearly a very valuable asset, and the Hong Kong government recognized that from the first. For that reason, all land in Hong Kong was sold on the basis of long-term crown leases generally ranging from 50-99 years. During periodic crises in the 19th century, various governors were lobbied by the business community to cave in and sell 'freehold' land (with perpetual title) to boost business confidence. But not one of them even flinched, and all of them, whether liberal or old-school, stuck to their guns in insisting on keeping the 'Crown Lease' system. Why? Hong Kong had from its very beginnings been a free port, and one of its main attractions was its lack of income tax (the 15% came later). Property taxes and property auctions, therefore, became the central money maker for the Colonial government (other than their opium monopoly).

A great example of this thinking came from the mouth of Governor William Des Voeux, who in the 1880s was trying to arrange for the financing of the first big land reclamation proposed by Paul Chater. He was a very frustrated man, because while Jardine Matheson could secure loans from HSBC at 3.5%, the sovereign Government of Hong Kong couldn't even get a loan at 4%! Eat your heart out, credit analysts. He was trying, in effect, to justify a better credit rating because of Hong Kong's huge fixed assets. On the subject of property, this is what he said:

"For though the area of the Colony is small, its Crown lands are of an exceptional value...there can be no moral doubt that the 20,000 acres of unsold land in the Colony will eventually realize an enormous sum. Indeed at this moment, if the necessity were to arise for changing the present policy of selling without the condition of immediate building, and abandoning the speculators the profit that will otherwise be reaped by the community, there would be little difficulty of obtaining from sales within a few weeks an aggregate sum equal to several times the Annual Revenue of the Colony."

Translating his Victorian English, he is basically saying that if he sold land in perpetuity, he could raise tons of money but that he'd be abandoning the local market to speculators. What he does not say is that the Government by default becomes the biggest land speculator of them all! As those of you who know Hong Kong will recognize, absolutely nothing has changed in 130 years (and Tung Chee-Hwa's tentative steps away from this policy ended in disaster).

What does that mean for Hong Kong? It means that we are stuck with quick maximization of returns on property for the foreseeable future, exacerbated by HSBC and the banks not offering long-dated mortgages for old properties. It means Hong Kong people will continue to have a disposable attitude to their homes and property, which lies at the heart of the principles of this throwaway society. It means more dilapidated buildings from lack of interest in upkeep, continued cycles of construction and demolition, and that Hong Kong's three certainties will continue to be death, property taxes and the jackhammer. A culture of preserving Hong Kong's architectural heritage will never exist as long as this property policy, such a sacred cow to the government, remains.

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