How China Killed Hong Kong's Economy

This is a $167,000 parking space. What’s special about it? Honestly, not much. It’s a single, eight by sixteen foot slab of concrete in a frankly not very happening part of town. But hey, that’s why it’s so affordable! Other, better slabs of concrete have sold for as much as 1. 3 million. Welcome to the crazy world of Hong Kong real estate, where even modest 400-square-foot studios go for seven figures. And that’s not even the craziest part… The funniest thing about that $167,000 parking space is that it’s mere steps away from this — miles and miles of untouched jungle. This is that garage and this, all around it, is a whole lot of… nothing. Clearly, there’s no shortage of land. In fact, 75% of the city’s entire surface is completely empty — occupied only by wild boars, snakes, and monkeys. Developers would kill to sprinkle these mountains with 60-story high-rises as far as the eye can see. But… they can’t. The government owns every inch of land. And it only makes a measly 25% of it available to anyone but the monkeys. Needless to say, it does this out of love for money, not monkeys. The goal is to inflate prices by artificially reducing the supply of land. Each year, the government puts a tiny — I can’t stress this enough — tiny sliver of the other 75% up for auction, which it sells to the highest bidder. Last year, for example, just 0. 013 square miles were put on the market — or 0. 003% of the total. That’s in a city of over 7 million people! This was the only new land available in all of crowded Hong Kong for the entire year. Unsurprisingly, then, even this minuscule amount sold for nearly a billion U. S. Dollars — 100% of which went right back in the government’s pocket. With the stroke of a pen, it effectively created a billion dollars out of thin air. It turns out having a monopoly on land in the most land-constrained city on earth is a pretty lucrative gig. …So lucrative, in fact, that it can get away with some of the lowest tax rates on the planet. Its highest income tax rate — reserved only for the absolute richest of the rich — is just 16%, compared to 45% in Japan, 37 in America, or 24 in Singapore. And the average Hong Konger pays far, far less — about 2%. There’s no sales tax, no capital gains, or even inheritance. Now, there are dozens of tax havens around the globe, from the Cayman Islands to Bermuda. But they’re designed for the comfort of money, not people. None offers anywhere near the public services of Hong Kong. Only there do you get Japanese or European-level public transit, universities, and healthcare, for Cayman Islands prices. That’s a compelling offer, especially when your employer covers housing. Which is why thousands of successful, mid-career bankers, lawyers, and accountants in London, New York, and Houston wake up one day, pack their bags, and move their entire families thousands of miles away, to live here. Many like it so much, in fact, that they never go back — unwilling to accept a lower quality of life for a higher cost. So that’s the Hong Kong economic model: severely restrict the supply of land, then sell it for extortionate prices, then use that revenue to support a world-class city despite dirt-cheap taxes. But there’s still one missing ingredient. For this to work, someone has to keep buying all these million-dollar parking spots. It can’t be locals, who are quite unfairly priced out of their own housing market. And it can’t be expats; there simply aren’t enough of them. Luckily, it has an almost bottomless source of demand right next door called “China. ” When Beijing finally loosened its grip on the economy in the 1980s, it instantly created an enormous amount of wealth right on Hong Kong’s doorstep. Some 800 new Chinese billionaires — and countless

more millionaires — were minted between 2000 and 2018 alone. But this wealth was extremely anxious. And for good reason. As these entrepreneurs would soon learn, the Chinese government would now let you get rich, but there was no guarantee it would let you stay rich. Much has changed in China over the past 40-odd years — to say the least — but this much, decidedly, has not. Your company can employ hundreds of thousands of people. It doesn’t matter — in 2021, the $100 billion private tutoring industry was wiped off the earth with the stroke of a pen. You can accumulate astronomical wealth. It doesn’t matter — Jack Ma, formerly China’s richest man, was disappeared for saying vaguely disparaging things about the government… once. You can even keep your head down and be a good, loyal, low-level bureaucrat. But… it doesn’t matter — public employees have been ordered to return their end-of-year bonuses during economic downturns. As long as your money stays within its borders, it can always — be taken back. So, what do you — a Chinese supermarket or property mogul — do? You run. And where do you go? Somewhere safe. Somewhere with the rule of law. Somewhere with free and independent judges that respect private property and due process. Well, Hong Kong had all of that …and it had incredibly low taxes …and it had an incredibly strong real estate market …and it was just a stone’s throw away …and there was a good chance the person selling you that million-dollar parking space even spoke the same language. It was a match made in heaven. Chinese elites got a safe place to stash their cash outside the mainland and Hong Kong got insanely rich off land sales. Now, the key to all this — the only reason it worked — was that Hong Kong was caught in a strange political limbo… There are countless free democracies around the world. And there are countless more un-free autocracies. The two — freedom and democracy — so often go hand-in-hand that it feels strange to even say this. But Hong Kong, uniquely, was stuck somewhere in between: it had freedom without democracy. Its government has never been directly accountable to the public. During British rule, London appointed a Governor. Then, after the 1997 handover, Beijing effectively began appointing a Chief Executive. This was a necessary ingredient to its economic model because if it were a democracy, voters would, quite sensibly, pressure their representatives to solve the housing crisis. And if they did — if land became plentiful — the whole system would collapse — the government would lose this source of revenue. Yet, despite its lack of democracy, Hong Kong was relatively free. Money, ideas, and people moved in and out of the territory nearly unimpeded. When dissidents were driven out of the mainland, they often fled to Hong Kong, where they could speak their minds. There was no Great Firewall. Professors had academic freedom. There were no capital controls. And corporations trusted its courts to be fair and independent to the tune of billions of dollars. This was necessary because if it wasn’t free, investors would simply move their money elsewhere. The whole point of getting your money out of the mainland was to escape the Party’s control. And this truly one-of-a-kind combination — freedom without democracy — produced a truly one-of-a-kind city. 99% of cities around the world follow the same basic pattern because 99% are influenced by the same economic forces… Since building up is more expensive than building out, the convenience of the former only outweighs the cost for some people and industries. They inevitably cluster together in one or two pockets of density — this is the “downtown core. ” The rest sprawl outward. Nature succumbs to the “efficient use of land” until the city is drained of all its color. But not in Hong Kong. Its shortage of usable land leaves no room for anything less than one hundred percent efficiency. One-quarter of the city is built up to its

absolute limit — every inch of land accounted for and utility maximized. Meanwhile, the other three-quarters that surround it remain frozen in time — green, pristine, untouched nature. The effect this creates is breathtaking. You get the extreme density of Midtown Manhattan directly adjacent to the extreme serenity of the Hawaiian jungle. And you can peer down at the former from the latter. Hong Kong has more skyscrapers than New York, Chicago, Miami, and Houston combined — far more than any other city on earth. And it has the beach. And it has mountains. And it has clean, affordable, timely public transit to move between them. Earlier, I joked that developers would love to “sprinkle” the jungle with 60-story high-rises. But that’s not a joke — it’s really what Hong Kong looks like! This is not a 3D render. It’s actual footage of an apartment complex. And it’s a 20-minute hike away from this incredible vista. In what other city do you get this view from a public bus? In what other city is the term “urban jungle” made so literal — nature and city colliding in such close proximity that wild boars invade train stations where white-collar professionals are commuting to work? What other city lets you escape the cubicle on your lunch break with a view like this? Of course, this is not without its drawbacks. At 300 square feet, this is roughly the average size apartment for two, “middle class” Hong Kongers. This is the laundry room, this is the kitchen, and this, in case you missed it, is the bedroom. Nothing about this is fair or compassionate. And in no real democracy would voters tolerate being squeezed into coffin-sized apartments while wild monkeys roamed freely across the remaining 75% of all land. …All of this is to say: there’s no other place quite like it because there’s no political system quite like it. And there’s a reason: it’s fragile. The people, for example, can exercise their freedoms to demand democracy. And that’s exactly what they did. For a brief moment in 2019, there was hope that this paradox could be resolved by Hong Kong gaining democracy. That summer, two of its seven million residents marched in the streets, protesting a proposed bill that would allow extradition to mainland China. Soon, this evolved into a broader pro-democracy movement. Miraculously, it managed to sustain this momentum for nearly a year, holding major protests almost every weekend. But then, while the world was distracted by the pandemic, Beijing reacted — resolving the paradox, but not in the protestors’ favor. Instead, it exploited the absence of democracy to dismantle Hong Kong’s freedom. It foisted upon the city, without a single vote, a “National Security Law,” which outlaws the vaguely defined crimes of “secession, subversion, terrorism, and collusion. ” Now, on paper, that’s it. Hong Kong still has its own, separate passport, currency, and legal system. Even the courts are still widely considered fair and independent. In fact, six British and Australian judges sit on its Court of Final Appeal. The National Security Law doesn’t change any of this. What it does do, however, is create a second, parallel court system. And this one is most certainly not fair or independent. Its judges are hand-selected by the government. Its trials can be held in secret. And its police don’t need search warrants. So, what qualifies as endangering “national security? ” So far, reading a newspaper in public, publishing children’s books, and wearing the wrong color shirt. In short: whatever the government decides. …Which means any person, any company, any property, or bank account in the territory could be placed under Beijing’s control. With neither freedom nor democracy, Hong Kong begins to look more and more like mainland China. And the more it looks like China, the less advantage it has over China. Why should you, a Chinese supermarket or property mogul, take your money to Hong Kong if it isn’t any safer?

You could just as easily escape the Party’s reach in Singapore, London, or Vancouver instead. Now, that alone would be bad enough. But it gets worse: Hong Kong is also caught in the middle of the U. S. -China trade war. Its currency is pegged to the U. S. Dollar — meaning it’s affected by high U. S. interest rates. And it finds itself more dependent than ever on the Chinese economy at the exact moment its growth is slowing. Meanwhile, the city’s best and brightest — its future workforce — is fleeing. Thousands of highly educated, high-earning, often English-speaking families have escaped China’s grip by moving to the U. K., Canada, or Australia. For all these reasons, demand for property has plummeted. One $77 million mansion, for example, recently sold at a 60% discount. And less demand, of course, means less revenue. Last year’s land sales were the lowest since the Great Recession — a tiny fraction of the $20 billion it collected just a few years ago. In fact, two of the five auctions had to be canceled after no one offered more than the minimum bid. Land used to pay for a third of the city’s budget. Today, it barely makes a dent. The city has been running a deficit for all but one of the past five years. Which means sooner or later it will either have to drastically reduce its spending or drastically raise its tax rate. Either it will lose its world-class public transit, healthcare, and universities, or it will lose its tax advantage. One way or another, Hong Kong will slowly lose the very things that make it special. After Beijing imposed the National Security Law, its allies were quick to highlight similar laws around the world. “Hong Kong,” they said, was just “becoming more like the rest of the world. ” In a way, they were right. That, after all, is what those of us who love Hong Kong fear the most. In 2021, the Hong Kong government replaced public school curriculum that taught critical thinking and problem-solving skills with a new course emphasizing “patriotic” rote memorization. And frankly, I can think of no better endorsement of the former — the exact skills taught by today’s sponsor, Brilliant. Brilliant doesn’t teach you what to think, it teaches you how to think. That’s what makes it such an effective tool for learning and that’s what makes those very skills so threatening to Beijing. Brilliant has courses on everything from strategy puzzles, to logic games, probability, and programming. You pick what you want to learn and Brilliant guides you through the material with interactive lessons, engaging animations, and real challenges that put your problem-solving skills to the test, like building a music recommendation algorithm for Spotify. This, not rote memorization or hour-long lectures, is the most effective way to truly understand a topic and cultivate a lifelong learning habit. Another great thing about Brilliant are its iOS and Android apps, which help you replace mindless scrolling through social media you’ll regret with new knowledge and skills you’ll actually feel proud of. When you’re ready to try Brilliant completely free for 30 days, click the link on screen now or in the description below — that’s Brilliant. org/PolyMatter. Doing so will also get you 20% off an annual premium subscription. Go, pick whatever you want to learn, and start today!