Economist.com Cities Guide: Hong Kong Briefing - August 2006

News this month

Anson ascending

A woman who was once one of Hong Kong's most revered public servants has re-emerged as a possible candidate for chief executive. Anson Chan Fang On-sang resigned as chief secretary (the administration's second-highest post) in 2001. She has returned to the spotlight with a strong pro-democracy message, and has not ruled out a bid for the city's top job, now held by Donald Tsang. A committee of 800 people, largely representing Beijing and big business, will elect a chief executive in March. Ms Chan's strident calls for reform make her unpopular in Beijing, but the government is reportedly wary of quashing her campaign, which could simply fuel the pro-democracy movement.

Ms Chan has spent the last year boosting her profile, with many appearances at pro-democracy events. In a speech at the city's famed Foreign Correspondents' Club in July, she criticised Mr Tsang's reforms as too meagre and said she would form a small group to devise a plan for achieving universal suffrage. There were plenty of people eager to hear her ideas-the room was completely full and extra screens had to be installed in the club's bar to accommodate overflow. However, a recent poll by the Institute of Asia-Pacific Studies found that if residents could actually vote for the next chief executive-which they can't-only 24.5% would support Ms Chan, compared with 53.6% for Mr Tsang.

I spy

A long battle over privacy rights came to an end of sorts on August 6th, when Hong Kong's Legislative Council (Legco) passed a bill to regulate police surveillance. The law, which will go into effect on August 9th, creates a system of secret courts to issue warrants for surveillance and wiretapping. The bill was very contentious: it was passed after a 57-hour debate, one of the longest in Legco's history. Many pro-democracy legislators staged a walk-out after the majority of council members rejected all 200 amendments that they had put forward, then failed to include a "sunset clause" that would nullify the law after two years unless it was renewed.

Controversy over the measure is likely to continue. In the first week of August Legco's president barred pro-democracy legislators from proposing 20 further amendments, pointing to a rule that prevents the tabling of amendments that would incur further costs. Now one legislator, Leung Kwok-hung, wants to challenge such rules in court. Human-rights groups, meanwhile, contend that the new warrant system is unconstitutional under Hong Kong's mini-constitution, the Basic Law.

Trying to sell a tax

After years of talk, Hong Kong officials are finally trying to widen the city's tax base. In July Henry Tang Ying-yen, the financial secretary, proposed setting a flat 5% goods-and-services tax (GST). The levy would produce about HK$30 billion ($3.86 billion) annually. The public has until March 2007 to comment on the scheme, but the tax is already under siege. Critics say that the GST could compromise Hong Kong's attractiveness to global businesses, and place an undue burden on the poor. Mr Tang has suggested various solutions to these problems, including more aid to poor families, cuts in other taxes and a promise that the GST would not apply to financial services.

Mr Tang argues that this proposal is a good way to beef up Hong Kong's flimsy tax revenues. The government does not tax dividends or capital gains, relying mainly on taxes from salaries, business profits and land sales. This lax system has left the city's finances in a precarious position-a problem that became painfully clear after the 1997 Asian financial crisis, which triggered six years of recession and a series of government deficits. Only 17% of Hong Kong residents pay the salaries tax, as most do not earn above the tax-free threshold, set this year at $HK100,000. Even those who are taxed pay only a small share of their income; this year's maximum tax rate was 19%. Meanwhile the land-sales tax is particularly vulnerable to swings in the property market, and critics say it gives developers too much sway over government policies. Still, calls for fiscal prudence may fall flat, particularly at a time when Hong Kong's economy is going strong-GDP grew by 8.2% in the first quarter, compared with a year earlier.

Sell out

The bidding war for the telecommunications and media assets of PCCW, Hong Kong's largest fixed-line operator, fizzled out at the end of July, when the company rejected a foreign takeover. In late June news broke that Australia's Macquarie Bank had offered HK$40 billion for PCCW's broadband television, fixed-line and mobile-telephone businesses. Newbridge Capital, part of Texas Pacific Group, an American private-equity firm, soon placed its own bid for the assets. But on July 25th PCCW announced that it had called off talks with both bidders because of objections from China Netcom, a state-owned company with a 20% stake in PCCW, over foreign ownership of such "strategic" utilities.

The foreign bids were effectively thwarted two weeks earlier, when Richard Li Tzar-kai, PCCW's chairman, sold his 22.6% stake for HK$9.16 billion to Francis Leung Pak-to, an associate of Li Ka-shing, Asia's richest man and father of Mr Li. Many suspect this deal had less to do with boosting PCCW's stock value than with pleasing the mainland government. A committee of the Legislative Council, Hong Kong's partially elected parliament, is investigating the matter, and at least one foreign shareholder group, the Securities Investors Association of Singapore, has threatened legal action over the way the deal was handled.

Buzz kill

The fatal overdose of a teenage girl has prompted a crackdown on drug-dealing in Hong Kong's nightclubs. Chek Wai-yin, aged 13, died from a suspected overdose of ecstasy and ketamine after leaving a popular nightclub in Kowloon on the morning of July 26th. Her death was followed by reports that the number of teenagers being arrested for drug offences rose by more than one-third from 2004 to 2005, and that prostitutes were openly selling cocaine in one of the island's more popular party spots. Police have responded by staging more raids of busy night-spots, to the chagrin of club operators. They are not only searching revellers, but also distributing leaflets and giving lectures on the perils of drug abuse.

Catch if you can

August 2006

Harbin Ice Lantern Festival

Until September 17th 2006

Hong Kong, now wilting in the summer heat, is not the most natural site for an ice lantern festival. Nevertheless, a refrigerated room in a shopping mall is presenting the work of 22 ice-carvers from northern China. Harbin, in the far north-eastern province of Heilongjiang, is renowned for its winter festival, when the city is transformed by massive sculptures of snow and ice. While the festival in Hong Kong does not have works on such a grand scale, the lanterns are impressive in their detail. Visitors can marvel at scale models of Beijing's Forbidden City and the Shenzhou 6 rocket, which blasted China's first astronauts into space.

The festival has proved a hit with locals seeking respite from the city's tropical summer, with children coming to cool their bottoms on a 14-metre ice slide. For visitors who linger too long, St John's Ambulance has established a post to treat hypothermia.

Cityplaza, 18 Taikoo Shing Rd, Taikoo Shing (take the Blue MTR line direct to the mall). Tel: +852 2568 8665. Admission: HK$20.

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