On our trip to Asia last month, my wife and I made a last-minute call to make Hong Kong our first stop.
I have a good friend from college who now works there. He took an investment banking job in HK, and then moved to Singapore, The Phillipines, and just moved back to HK to cover emerging markets for a prominent investment bank. With him on the ground, I was looking forward to getting his take on Asia’s renewed boom.
The Seeds of Hong Kong’s Economic Miracle
Respect for rule of law – a staple of many British colonies – and laissez faire capitalism are credited with Hong Kong’s meteoric economic rise, from backwater to one of the richest nation’s in the world in less than 50 years. Partially thanks to Hong Kong’s nebulous ownership status post-WWII, it benefited from what appears to be the best form of government – as little as possible.
The Brits weren’t sure what to do with Hong Kong, so they did nothing. Since taking formal control back in 1997, the Chinese have to date continued the hands off governing tradition.
China’s New City-State Model
On the way to Hong Kong, I read an excellent book by Dutch journalist Willem van Kemenade entitled China, Hong Kong, Taiwan, Inc.: The Dynamics of a New Empire. Van Kemenade lays out the history of China, and has a great feel for the culture and mood of the Chinese, having lived there for over two decades. The city-state model I’m laying out here is entirely attributable to Van Kamenade’s excellent book.
When the British handed Hong Kong back over to the Chinese in 1997, it became the first lab rat in what appears to be Chinese experimentation with city-state governance. Rather than fold Hong Kong into the Big Red Machine, Chinese leadership opted instead to keep this money making jewel mostly independent from mainland China. While technically governed by China, Hong Kong remains today an independent city-state, more or less.
My wife and I were able to gain entrance to Hong Kong via our US Passports alone, where we were stamped and allowed to stay up to 3 months. Had we tried to enter mainland China, we’d have needed a Visa.
Hong Kong still maintains its highly favorable flat tax structure that has served as a bastion of laissez faire capitalism. China, by contrast, takes roughly half of its citizens earnings in the form of taxes. In fact, an article I read in the South China Morning Post lamented that China’s tax structure is actually the second most onerous in the world (with France taking the dubious title).
China’s somewhat nebulous (probably intentionally so) city-state model has been expanded to include the world’s new top gambling hot spot, Macau. A former Portuguese island that used to be run by gangs, the riff raff have now been pushed to the edges of the island as famous Las Vegas developers, like Steve Wynn, have taken the opportunity to setup state-of-the-art facilities. Macau’s gambling revenue now exceeds that of the Las Vegas strip – in fact, its rake is up over 40% year-over-year, which the South China Morning Post reported as “the equivalent of adding an additional Las Vegas Strip” in terms of revenue.
I asked my friend about Macau – he described it to me as “Las Vegas – minus the shows, food, and other fun stuff.” It’s just gambling – in it’s purest form!
But who exactly governs Macau? He didn’t have a clear answer. And I’m not sure anyone does. It’s another example of China’s nebulous city-state governance model. Technically it’s under Chinese jurisdiction – but it’s allowed to run mostly on it’s own.
Tough to be Bearish on China and Asia From Hong Kong
From my downtown Sacramento office, I had previously written about my skepticism in the Chinese economic miracle – based largely on stuff I read on the internet. It’s a bit embarrassing when I phrase it that way :).
I have got to say, it is VERY tough to be bearish on China from Hong Kong. While technically not a part of mainland China, it’s 95% Chinese. Many Westerners envision a bunch of Brits and Americans running around on a Manhattan-esque island off the coast of China – which is not entirely off base, except you’ve got to replace the Anglos with Chinese.
I have to admit – from a skyline/money/finance perspective, Hong Kong may now out-Manhattan Manhattan. If it doesn’t yet, I’d bet it will soon.
One thing that hit me in the face is that the Chinese culture struck me as inherently conducive to economic growth. Hong Kong has night markets that span as far as the eye can see. Entrepreneur vendors peddle wares, food, souvenirs – you name it. It seems like everyone in the city knows how to make a buck.
(And yeah, I know I was in Hong Kong and not mainland China, but I’m going to extrapolate the culture to the mainland, given that HK is predominantly Han Chinese. I used to live right next to San Francisco’s famous Chinatown. I found Hong Kong’s markets were far more expansive than SF).
I am now a believers in Marc Faber’s view on China – namely that sure it may crash, eventually, but who knows when. And I am finally a believer in Jim Rogers’ China bull take. It took me actually coming to Asia to get it – imagine that!.
Most interesting to me was the fact that mainlanders ARE spending money on premium goods in Hong Kong. The Chinese are often stereotyped as refusing to pay up for things, instead opting for cheap or free knock-offs. While there may be no shortage of knock-offs, there’s also an awful lot of money going to purchase premium brand name goods as well.
Major Industries in Hong Kong: Finance and Import/Export
Singapore and Hong Kong are the two finance/business havens in Asia. Hong Kong’s main advantage is that it is closer to mainland China. Part of HK is literally a portion of the South China coast, while Singapore is a 4 hour flight south.
Singapore, however, it starting to gain traction, and is taking away companies due to favorable government city planning, cleaner environment. With Asia booming, though, I’d anticipate both financial hubs will continue to boom as well – there’s plenty of capital to go around.
Investing Thoughts and Themes
- I read that Hong Kong’s stock index is cheaper than the S&P 500. Seems backwards – you get higher growth at a cheaper valuation. Anyone up for a long HK/short S&P trade?
- If you’re thinking about getting exposure to Asian emerging markets, be wary of the ETFs. My buddy, who covers emerging markets in the region, shared with me that he never buys ETFs or indices because there’s “a lot of crap”, to put it bluntly. Many stocks represent family owned businesses – they are neglectful business managers because they already have enough money, and just don’t care any more. He finds it best to focus on the well run companies.
- Of course that’s a lot harder than just buying a Vietnam ETF. You have to do some homework – and you need a brokerage account that lets you buy those stocks. So I guess they don’t call it alpha for nothing :).
- Interestingly, China is not as enamored with technology for economic growth as we are in the US. While we look at Facebook, Apple, and Google as economic growth drivers, they don’t think that tech creates enough jobs to move the needle, and prefer to focus on “older school” industries.
Hong Kong Cultural Musings
- We asked our friend over lunch about a few museums that looked interesting. He laughed, paused for a second, and said: “Don’t bother with museums here. Hong Kong is all about money and food.”
- Every household in HK has a live-in housekeeper, usually from the Phillipines, Vietnam, or another country in Southeast Asia.
The Chinese Government “Issue”
Hong Kong was guaranteed “hands off” status by Chinese gov’t until 2047. This promise has been honored so far. But will it continue if a downturn hits?
Also it’s worth noting there is some underlying animosity between mainland China and Hong Kong. Some in mainland China hold the belief that Hong Kong has skated by and benefited most from the sacrifices they’ve made on the mainland to get to this point.
China Actually Aspires to Have MORE Lawyers!
I read this in the South China Morning Post and almost fell out of my chair. An article cited the low number of attorneys in China, and held the US and UK up as example legal models to strive for. Made me wonder if the Anglo legal system is more of a net positive than it’s given credit for, at least in the Western world.
Not sure – the more I learn, the more I realize I don’t know anything about anything. It’ll be interested to see if and how the legal system and profession in China evolves as they contniue to grow.
The Growing Dichotemy of Wealth in the World
Historically, economies that could mobilize an efficient workforce were the most effective in the industrial age (UK first, then the US, then Germany and Japan post-WWII).
Now that the rest of Eastern Asia is mobilizing its workforce, I anticipate growth is practically “baked in the cake” as they industrialize (with China leading the way). I see no reason why their levels of wealth should not approach our current levels in the West. Though they may get old before they actually catch up – see our interview with demographics expert Harry Dent for me on this topic.
In the Western world, the path ahead economically is unclear. We’ve already industrialized – so now what?
For individuals, I think the best course of action is clear – it’s best to be an entrepreneur these days, so that you personally can reap the benefits of globalization and platform companies.
This may be fine for you and me, but I’m not sure what the rest of the American workforce is supposed to do – everyone is not going to be an entrepreneur. But I have to admit, centrally planning an economy is beyond my expertise!
Miscellaneous Hong Kong Travel Tips
- The food is EXCELLENT.
- Check out a famous night market for a true capitalist experience. We attended the Temple Street Night Market in Kowloon, it was awesome.
- Go get yourself a foot massage – and you can thank me later. We hit up Happy Foot, and would highly recommend them- they have several locations in HK.
- If you get homesick, check out the Soho district, a great place for expats, filled with bars and restaurants. Some of the bars are hilariously over-the-top American.
- Check out The Peak. We took a taxi to the top, at the recommendation of our friend, and avoided the crowded and supposedly touristy Tram. We walked down – it’s a helluva workout, but doable if you’re in the mood for it. (I’d have collapsed has we tried to walk up).
Recommended reading: China, Hong Kong, Taiwan, Inc.: The Dynamics of a New Empire