China focuses on Hong Kong’s wealth gap and housing problems after political purge

After stifling opposition groups in Hong Kong, China’s leaders plan to attack the city’s huge wealth gap and lack of affordable housing that Beijing blames for fueling social unrest.

Senior officials are discussing ways to expand the city’s tax structure and increase the land supply in an effort to mitigate inequality and high costs of living in one of the world’s most expensive cities, according to people familiar with the discussions. The deliberations could lead to far-reaching reviews of Hong Kong’s economic and social welfare systems, although no specific proposals have been tabled, the people said.

Changes to Hong Kong’s low-tax system would raise revenue for higher social spending, but one challenge is how to do this without undermining the city’s attractiveness as a financial and commercial hub. Land policy reforms can help improve access to cheaper housing, although officials must overcome the entrenched influence of local real estate moguls, whom Beijing views as too passive in supporting the government’s goals.

For Beijing, efforts to curb dissent in Hong Kong over the past year – from rallying opposition figures for national security positions to a planned revamp of the city’s electoral system – are intended to pave the way for social reforms and economic. The political crackdown has drawn criticism mainly from Western governments, who accused China of violating its promises to allow the Hong Kong government to remain semi-autonomous until at least 2047.

China’s control over Hong Kong

What Beijing ultimately wants to address in Hong Kong is “not politics, but deep-seated problems,” including the city’s lack of affordable housing and “deeply polarizing income gaps,” said Bernard Chan, a member of the national legislature of China and Hong Kong. Kong’s Cabinet.

Chinese Vice Premier Han Zheng and other senior officials have told Hong Kong politicians who support Beijing that local authorities must solve fundamental social problems that they believe have sparked political unrest in recent years, Chan said. “They want us to fix it,” he said.

Opposition politicians are skeptical that Beijing can overcome the decades of political inertia and infighting that plague Hong Kong’s political and business elite, even if what the Communist Party defines as “true patriots” are in command.

“These patriots are probably also people with vested interests. They don’t know about the problems of the poor, ”said Emily Lau, a former chair of the Hong Kong Democratic Party who was a local legislator for a quarter of a century.

Beijing has long been aware of Hong Kong’s social inequalities, but “they never bothered to solve it,” Lau said. “What makes you think they’ll figure it out now?”


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Chinese officials have shown confidence that tackling Hong Kong’s structural problems will be easier with loyalists firmly in charge. That’s despite the failures of successive Beijing-anointed leaders in Hong Kong to remedy such problems since Britain returned the city to China in 1997.

Under Beijing’s new approach, if Hong Kong rulers “cannot serve the people well, they must resign,” wrote Tian Feilong, a Beijing professor and member of a Chinese government-backed think tank on Hong Kong policy. . month.

The Hong Kong government declined to comment on whether political reform discussions were taking place.

Beijing telegraphed its concern about social inequalities last year, when Luo Huining, director of the central government liaison office in the territory, visited the home of an unemployed worker during the Mid-Autumn Festival and said he was deeply sorry for the living conditions there.

Hong Kong’s Gini coefficient, a measure of income inequality scaled from zero to one, whereby zero represents complete equality, ranks among the highest in the developed world, rising to 0.539 in 2016 from 0.518 in 1996, according to government data. The city has been ranked the world’s least affordable housing market in an annual international housing affordability study conducted by the American research firm Demographia for 11 consecutive years since 2011, when Hong Kong was first included in the analysis. .

Hong Kong’s low tax regime, which has remained largely unchanged since the British government, does not impose any taxes on sales, consumption, capital gains, dividends or inheritance. About half of Hong Kong’s workforce does not pay taxes, and the maximum tax rate on wages is 17%, according to government data.

Options for making the tax system more equitable or funding social welfare more could involve modernizing the way personal income is taxed, said Michael Littlewood, a law professor at the University of Auckland who wrote a book on the tax system. From Hong Kong. For example, existing tax categories, covering wages, business earnings, and property, could be revamped to create a more comprehensive system that taxes people’s general income.

If officials are more concerned with financing higher social spending, they could increase revenues significantly by imposing a tax on goods and services, but this would be regressive and unpopular as lower-income households spend a higher proportion of their income. consumer income, said Mr. Littlewood said. In 2006, the authorities abandoned plans for such a tax amid public opposition.

In February, Hong Kong released its first stamp tax increase on stock transactions since 1993. The trade tax increase, from 0.1% to 0.13%, was intended to bolster government spending for help residents weather the pandemic, but it sparked a sell-off in the local market.

Hong Kong has kept its tax system low thanks in large part to its territorial policies, another legacy of British rule, which has long been criticized for artificially inflating real estate prices that boost government coffers and government profits. developers. Property experts say this system effectively imposes shadow taxes on residents through high housing and rent prices.

From 2004 to 2019, Hong Kong’s homeownership rates fell 4.5 percentage points to just under 50%, well below levels in other prosperous economies, while apartment prices rose nearly fourfold, according to a document released this month by the Hong Kong Legislature’s Bureau of Investigation. Younger residents are “excluded from the market, as their earned income lags far behind the rise in asset prices,” he said.

Among the ideas Beijing is considering is speeding up government processes for rezoning land and approving projects, according to people familiar with the discussions.

Li Shan, a veteran banker and member of an advisory body to the Chinese government, told a policy forum in December that he had submitted a proposal to Hong Kong authorities on ways to address housing problems, including creating an association. public-private to build new homes. .

“The Hong Kong housing crisis is a policy issue and not a land shortage,” the Hong Kong Real Estate Developers Association said in a 2020 report, citing regulatory bottlenecks as a major problem. He proposed simplifying and streamlining the land rezoning processes, among other suggestions.

Such changes could put officials at odds with the city’s influential property tycoons, who have exerted enormous influence over land policy.

“Local tycoons need to think from the big picture,” said a government official familiar with the policy discussions. “Their interests will certainly be harmed to some extent, but the government does not want to eliminate them.”

Write to Keith Zhai at [email protected] and Chun Han Wong at [email protected]

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