In the annals of fashionable timing, Prada SpA’s trip to Asia deserves a mention.
It’s blowing off Milan and taking the largest initial public offering of a family-owned Italian company since 2006 to Hong Kong. The reason investors in Prada’s hometown must reach 5,800 miles away to buy the stock: Asia’s hot, Europe’s not.
It gets even better for Prada. The $2 billion IPO will hit the investment catwalk just as Hong Kong plans to send checks to scores of wealthy folks who don’t need the money. The city’s ill-conceived plan to dole out HK$40.5 billion ($5.2 billion) in cash and tax rebates will aid the Prada set more than the poor. Hmmm, what’s Cantonese for “ka-ching,” I wonder?
Too bad the money isn’t being aimed at the other end of an economy suffering from one of Asia’s worst rich-poor divides. The government, desperate to bolster its credibility, is engaging in a transparent and short-sighted effort to buy support. Getting short shrift is worsening poverty and inflation that’s the highest since 1997.
It’s all so George W. Bush, circa 2001, and speaks to the incompetence of a government investors tend to view as among the most able around. Hong Kong must narrow the gap between the obscenely wealthy and everyone else. It should use the money to bolster the underfunded pensions of the less well-off and provide more affordable housing, health care and education.
Instead, a good chunk of the spoils are going to those most likely to head off to luxury shopping malls and swanky eateries. Such instant gratification is hardly what an economy awash in inequality and overheating risks needs.
True, Hong Kong faces an embarrassment of riches. Its reserves will probably rise this fiscal year to HK$591.6 billion, or 34 percent of gross domestic product. It will likely have a surplus of HK$71.3 billion by the end of March.
Yet to paper over a crisis of political legitimacy, Hong Kong’s leaders are spending the surplus rashly, just as former President Bush did a decade ago. And how well did that work for the U.S., which now is drowning in debt?
Hong Kong often is ranked as the world’s freest economy thanks to its low taxes, unrestricted entry of foreign capital and rule of law. Never mind that Hong Kong has a pegged currency, the only state-backed Disney theme park, a leader chosen in Beijing and an oligarchic economy, one towered over by Li Ka-Shing and a handful of fellow tycoons.
Hong Kong’s standing owes much to the conservativeness of the government and its predictability on financial matters. Yet the city’s bureaucracy is unimaginative and suffers from a unique kind of moral hazard. Proximity to China has bred a dangerous complacency. Why retool your economy when the 10 percent growth across the Pearl River Delta is all that matters?
Incompetence looms large these days, and China knows it. In December 2009, Premier Wen Jiabao told Hong Kong leader Donald Tsang to address “deep-rooted contradictions” in society. A year later, Wen told him to improve living standards.
Hong Kong plans to give HK$6,000 to permanent residents aged 18 or more, and will give the 38 percent of the workforce that pays income tax a 75 percent rebate capped at that level.
There are indeed some givebacks for low-income workers, including a plan to waive two months’ rent for public-housing tenants. It marks a surprising U-turn by the government, which had initially planned to give workers HK$6,000 each in their pension accounts.
That, I would argue, was a better way to go. A household of two adults would have had the feel-good factor of the equivalent of getting about $1,500 U.S. dollars in their pension fund. Now, that money is being sent out as cash to fan inflation and benefit few but the Pradas and Loewe AGs out there.
The number of Hong Kong’s 7 million people living in poverty rose to a record 1.26 million in the first half of 2010, from 1.2 million the prior year, according to the Hong Kong Council of Social Service. Contrast that with a January Forbes magazine report that the wealth of the city’s 40 richest people grew 20 percent to $163 billion from $135 billion in 2010.
Bad governance isn’t confined to the economy. Take uninspiring efforts to clean Hong Kong’s darkening skies. It plans to ban idling engines to reduce vehicle emissions, a victory for the 14-year battle to curtail smog. Then it announced so many exemptions that it’s partly, well, hot air.
Most finance ministers would kill to be in Hong Kong’s situation. Timothy Geithner in Washington, Yoshihiko Noda in Tokyo and George Papaconstantinou in Athens can only dream of the balance sheet enjoyed by their Hong Kong counterpart.
Yet Hong Kong is taking steps that will do little to prepare the economy for tomorrow and adding to an inflation rate that may reach 4.5 percent this year.
Nice job, folks.
By William Pesek
William Pesek is a Bloomberg News columnist. The opinions expressed are his own. ― Ed.