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VOL. 38 | NO. 35 | Friday, August 29, 2014

Welcome to rapidly changing Hong Kong

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I have now lived in Hong Kong for nearly a month and just realized that I have failed to properly introduce you. Allow me to give you the tour.

Between 1842 and 1997, the British controlled the 425-square-mile territory of Hong Kong, which includes Kowloon, the New Territories and over 200 smaller islands.

Its proximity to China and its deep-water ports make Hong Kong an ideal trade destination.

When China re-opened in the 1980s, manufacturing boomed in nearby Shenzhen, and Hong Kong became the natural financial and logistics center – China’s front office in a way.

Hong Kong has always enjoyed high levels of economic, legal and regulatory freedom. Even today, after the handover to the Chinese, Hong Kong still ranks first in the 2014 Index of Economic Freedom published by the Heritage Foundation.

Curiously, Hong Kong achieved this status having never operated as a democracy. As a consequence, populist policies never took root, making Hong Kong perhaps the largest meritocracy on the planet.

Hong Kong instituted the world’s first flat tax rate (15 percent) in 1947. There are no payroll taxes, no estate taxes, no capital gains taxes and no VAT taxes.

The entire tax code in Hong Kong is less than 200 pages, and government spending amounts to less than 20 percent of GDP. Compare that with the US tax code, 74,000 pages and government spending of more than 40 percent.

More than 7 million people live in Hong Kong, and 60 million-plus tourists, primarily Chinese, visit annually spending more than $1,000 per visit.

As a consequence, the streets of Hong Kong offer every indulgence imaginable. The public transportation system may well be the best in the world. Typical of Hong Kong, these systems are privately owned.

The unique combination of economic freedom, western institutions and eastern development capacity has made Hong Kong one of the fastest-growing and most affluent locations on the planet.

A recent report claims that Hong Kong has the most multi-millionaire residents at 15,400, ahead of New York’s 14,300. The world’s most expensive home, all 4,600 square feet, is on sale in Hong Kong for $106M USD.

Despite its affluence, Hong Kong has its challenges. The escalation in housing costs has created high unaffordability levels. This will likely lead to an expansion of the meager entitlement system to support the poor, putting upward pressure on tax rates.

Currently, pro-democracy advocates have clogged the streets of the central business district to pressure the Chinese into allowing universal suffrage. If successful, populist policies will surely follow, bridling Hong Kong’s laissez-faire tendencies.

The population influx also will multiply as the world’s longest bridge will soon connect Hong Kong to Macau and Zhuhai, putting more pressure on prices, resources and the environment.

Bottom Line: Hong Kong has long set the bar for free and open capitalism. With populist pressures building and Beijing now the landlord, interference levels are increasing. Things will change gradually, but the rapid rise of China’s influence cannot be evaded … by any nation.

David Waddell, who is regularly featured in the Wall Street Journal, USA Today and Forbes, as well as on Fox Business News and CNBC, is president and CEO of Memphis-based Waddell & Associates.