The milk powder link

Oct 02, 2014

HONG KONG PROTESTS: THE ECONOMIC FALLOUT

By Matt O'brien


HONG KONG'S struggle for democratic rights promised by China has erupted onto the streets in recent days. But although this is a political battle, part of the reason Hong Kong is fighting so hard for its freedom is that it's already seen what being subsumed by the mainland means economically. And it's had enough of that.

China's rise hasn't just lifted hundreds of millions of people out of poverty. It has also transformed the economic balance of power with Hong Kong. Hong Kong's economy is 3 per cent the size of China's today, compared with 18 per cent when Britain handed over the city in 1997. All this growth in China has created a new class of mainlanders who want, and can afford, the very best that Hong Kong has to offer.

That means apartments, luxury goods and even baby formula. It's all about status, prices and trust. There is no better way for mainlanders to show that they've really made it than to buy property in Hong Kong. The real estate appetite of wealthy mainlanders happy to pay in cash has contributed to a doubling of Hong Kong property prices since 2009. As a point of comparison, prices had, in total, increased 26 per cent the 16 years before that.

So it's no surprise that more and more Hong Kong residents have found themselves priced out of the city. Nor is it a surprise that the Hong Kong Monetary Authority has tried to stop mainlanders from buying up quite so much by making them put an extra 10 per cent down. (Although that doesn't do much when wealthy Chinese are paying in cash.) It has been the same story with designer goods. China has high taxes on high-end goods to try to discourage at least a little of the conspicuous consumption that has come with its economic miracle. Hong Kong is exempt from this tax, so mainlanders flock there - 50 million did so last year - to get relative bargains on Louis Vuitton and all the rest.

But maybe the most in-demand luxury good isn't one at all: It's baby formula.

Ever since China's tainted supplies were blamed for the deaths of at least half a dozen infants in 2008, mainland parents have gone as far as Germany to buy foreign brands they trust. The easiest, and most economical, trip, though, isn't halfway around the world; it's to Hong Kong. It also has the non-Chinese brands that Chinese parents covet - or at least it did until mainlanders bought out the supply. That sparked one of the most unusual export bans you'll ever see. The Hong Kong government started limiting people to two cans of baby formula if they left the city, and then it tried to crack down on the smugglers.

It's true that China's growth has been good for Hong Kong - especially the retailers - but it hasn't been as good for residents' relative standard of living. Not only have the richest mainlanders caught or surpassed them, but now those Chinese also are pushing up their cost of living and snatching up everything from their stores. That's why Hong Kong residents say the mainlanders are "locusts" who come in, take everything and then leave - and with bad manners, too. In other words, it's the same old story of old money vs the nouveau riche.

Hong Kong has already seen what being just another part of China is like economically. The last thing it wants is the political version.

WASHINGTON POST