Webb-site.com - 2018年10月30日
Good evening. It’s a real pleasure to be here at the University of Hong Kong, addressing future leaders in all walks of life.
I can confidently say that I have lived in Hong Kong longer than most of you, as most of you are under the age of 27. I arrived in 1991 as a 26-year-old investment banker. I worked all over Asia doing IPOs and mergers and acquisitions for 3 years, and then moved to work for a local tycoon as an in-house adviser for 4 years. In 1998, I retired and established Webb-site.com, a non-profit platform which I personally fund, to promote better corporate and economic governance. For perspective, that was the same year that a search engine called Google was launched.
Webb-site.com takes around half of my time. In the other half, I research and invest in Hong Kong-listed smaller companies, exploiting some of the market inefficiencies that come from bad corporate governance. For those of you studying economics, it is what George Akerlof called the lemon problem. Think of me as an expert mechanic, walking around a second-hand car lot in which there are no warranties, and all of them are discounted for the risk of being lemons. Not only that, but as most listed companies have a controlling shareholder, I am getting into the back seat – so I must find well-maintained cars with good drivers.
By avoiding most of the crooks most of the time and getting a substantial discount on good companies, I have been able to outperform the market by an average of 12% per year since 1995, something that would be nearly impossible if we ever got all the legislative and regulatory reforms that I and others have been calling for, because the lemon-discount would then be removed. That would raise stock valuations, attract more companies to the public markets, and lower the cost of capital for businesses across the economy.
Unfortunately, the Hong Kong Government has chosen to move in the opposite direction, by allowing the listing of second-class shares with lower voting rights, by leaving HKEX as a monopolistic for-profit regulator with all the conflicts of interests that involves, by preventing access to justice through class actions, and in numerous other ways.
Of course, this restriction of voting rights is entirely consistent with Chinese Government policy, and that is perhaps the most worrying thing about it – we could end up with a country in which the people have no real votes for their Government and no real votes for their capital, leaving a cosy relationship of new-economy tycoons and the Party together controlling most of the economy. That may be socially acceptable if the economy appears to be going well and standards of living are still rising, but it is a toxic recipe for social unrest if the economy stalls.
And that brings me to the central topic of tonight’s speech: freedom.
If you are studying biology, then you will appreciate that Darwinian adaptation and survival of the fittest through competition brought about life on Earth as it is today. There was no divine central-planner making us in his or her image.
If you are studying engineering, you will appreciate that the utility of a robot depends on its degrees of freedom. If it can move in 3 dimensions, and pitch, roll and yaw on 3 axes, then its 6 degrees of freedom make it more productive than a fixed arm with a single elbow joint.
If you are studying economics, then you will appreciate that the greater the constraints on freedoms, the lower the economic output.
The simple fact is that there is no large economy on Earth that has reached high levels of personal income while maintaining the constraints on freedoms that China currently imposes.
In the first 25 years after reforms began in 1979, the Chinese Government picked all the low-hanging economic fruit. Workers can now choose where they work. Factories can choose what to make – there are no more production quotas. Farmers can choose what crops to grow and sell them at market prices. Private property rights are now largely respected. The Chinese stock markets reopened in 1990 after 41 years of closure. But despite all the rhetoric about “deepening reforms” and “letting market forces play a greater role”, the reality is that reforms stalled over 10 years ago, and most of the economic growth you see since then is unsustainable credit-fuelled infrastructure and property investment.
You can generate GDP from construction activity, but if the things you build don’t produce an economic rate of return, then you’ve just wasted resources and increased debt, and the more you have built, the harder it is to find economically viable projects. The law of diminishing returns takes hold.
The Chinese Government still directly controls vast swathes of the old economy, including banks, energy, electricity, petrochemicals, metals, airlines, shipping, telecommunications and of course the media.
For sure, they created the illusion of market reforms by listing minority shareholdings in most of these sectors, but the Party cannot bring itself to let go of control. In fact, it has been heading the other way, by embedding itself in the Articles of Association of companies, requiring that the board of directors must consult the company’s Party Committee before making major decisions. That of course reflects the current reality of a state-owned enterprise, but if the economy is to prosper, then the state has to stop owning and controlling enterprises. These changes to corporate constitutions signal the opposite intent.
Put simply, the leadership appears to believe that, having raised the economy since 1979 from abject centrally-planned poverty by relaxing basic controls, it can stop there and centrally-plan the rest of the journey to prosperity, raising GDP per capita from where they are today, about one quarter of OECD levels, without giving up any more controls.
In November 1978, 40 years ago next month, Deng Xiaoping visited Singapore, a country not known for its political freedoms and one which has prospered economically while continuing to hold controlling interests in large parts of the economy. In essence, Singapore is a corporate conglomerate with the perks of statehood. China’s leadership has held out Singapore as proof that it can pursue the same economic path, but what they fail to recognise is that Singapore is a small, parasitic, city-state economy that benefits as an oasis of stability from the chaos and economic mis-management around it.
Parasites by their nature must be small, feeding off the scraps from larger animals. China is too big to be a parasite of anything. It simply cannot succeed by scaling up the Singapore model by a factor of 250. To think otherwise would be to believe in intelligent design rather than evolution, to believe in central planning rather than the creative destruction of free markets.
Similarly, Hong Kong, while it is not a state conglomerate, is also a parasitic economy that has benefitted hugely from the constraints on freedoms in China by acting as an entrepôt and running the only international capital market on Chinese soil.
Hong Kong has prospered, to a large extent, because of China’s glacial pace of reforms. 40 years after Deng’s visit to Singapore, Chinese citizens are still not free to move capital in and out of the country. They still get a filtered view of the world behind the Great Firewall of China, reading state-controlled stories in state-controlled media, until they travel overseas and discover what they don’t know. They are not even free to make fun of the leadership, as Winnie The Pooh will confirm. They have only just been allowed to have two children rather than one, and claiming education and healthcare benefits still depends on the household registration or Hukou system, restricting labour mobility.
The reality, as predominantly Catholic countries like Ireland and Italy will confirm, is that the best form of mass contraception is economic growth. If Mao Zedong had been a capitalist, China would have been an economic powerhouse by the 1970s and would probably have 600 million fewer people today, and they would be enjoying a much higher GDP per capita while putting less pressure on water and other resources. It is one of the greatest ironies that Mao’s face appears on the that instrument of capitalism, the 100 RMB note.
Now, for those of you considering whether to remain in Hong Kong for your careers, you may feel somewhat concerned about the increasing grip of the motherland, or perhaps fatherland, on our affairs. Allow me to lay out some facts to help you make your decisions.
The promises of the Basic Law only last another 28 years and are subject to NPC Standing Committee interpretation. In 2047, you will be in your late 40s, with young children and in the most productive period of your life. Sooner than that, ten years from now, you will be in your early 30s and the Basic Law promises will have 18 years remaining.
In 1979, when Hong Kong Governor MacLehose visited Beijing, similar uncertainty was beginning over the New Territories lease, which had 18 years to run. The uncertainty led to a run on the Hong Kong Dollar until the peg was introduced in 1983, preceding the Joint Declaration in 1984. So unless China undergoes far more rapid political and economic reform in the next 10 years, in 2028 Hong Kong people will begin seeking assurances and perhaps a firm extension of the Basic Law. Otherwise, if you plan on becoming a barrister, will the Court of Final Appeal even exist in 2048, or will disputes be settled in the Guangdong High People’s Court?
So, should you stay and build your future and your children’s future here, or join a new brain drain, studying overseas for your second degree and staying there afterwards?
Hong Kong’s future is inextricably tied to China’s. There are plenty of reasons to be pessimistic. Political candidates are now filtered by civil servants for their views before being allowed to run for office, in case those views might actually get them elected. Even if they were elected, a cabal of tycoons via functional constituencies controls so many seats in the Legislative Council and on the Chief Executive’s election committee that the Government can’t function without their consent, and naturally protects their interests ahead of the public interest.
A seller of certain books not available in the mainland was abducted. A foreign journalist in Hong Kong lost his employment visa without breaking any law. Soon it will be illegal to turn your back on the national anthem, unless our courts decide that this is protected as freedom of expression under the Basic Law, and until the NPC Standing Committee overrides our courts with an interpretation. The Central People’s Government does not understand that respect is a state of mind that can only be earned, not commanded.
Elsewhere in our country, Muslims in Xinjiang are being rounded up and re-educated in concentration camps about the wisdom of the Party. And soon, the Chinese surveillance state, which co-opts the new economy giants to monitor behaviour, will give a social credit score to each citizen, perhaps denying potential troublemakers an exit permit to travel, a university place, or a job. Since 1989, the state has never forgotten that it’s the smart people who lead uprisings, and it’s the smart people who go to university – and that’s why you are all seen as a potential threat. Occupy Central just reinforced that perspective.
Meanwhile in Hong Kong, the latest political mantra is about the so-called “Greater Bay Area”, which is just a rebranded version of what Tung Chee Hwa’s administration called the “Greater Pearl River Delta”. Call it what you like, but the economic reality is that the area includes 3 different legal, tax, immigration and customs jurisdictions, and unlike San Francisco’s Golden Gate Bridge, you need 3 different insurance policies just to cross the bridge from Hong Kong to Macau, passing through mainland jurisdiction along the way, if you can get a bridge permit. Hong Kong and Guangdong business people have always co-operated to the extent possible, but further economic integration is limited by these barriers, as well as mainland capital controls.
If China’s government truly believed in the Greater Bay Area concept and in Hong Kong’s “System”, including its freedoms and free markets, then it would enlarge the Special Administrative Region to cover the whole of the Greater Bay Area and adopt the Hong Kong “System” within it. That would necessitate a boundary between the Greater Bay Area and the rest of China, until it too adopts those freedoms.
It was always the hope of the 50-year transition, or indeed 63 years from the Joint Declaration in 1984, that China would within that timeframe become an open and prosperous country, and the boundary with Hong Kong would become as invisible as the one between New York and New Jersey. China would become “One Country, One System”, and the “System” would be freedom and free markets rather than authoritarianism and central planning. The over-bearing presence of the state in people’s lives and in the economy would give way to the freedoms and consequential prosperity that other countries enjoy.
I remain optimistic about reaching that destination, because I think the People of China will not accept anything less. Failure to reform is not a viable option. But I am uncertain about which path we will take to get there. There are in essence two paths:
Ideally, a new, enlightened leadership would emerge in Beijing and pursue civil liberties, free markets and gradual introduction of democratic accountability. Call that top-down reform. There is no sign of that at present, rather the opposite.
Alternatively, the Party will continue to maintain and even tighten its grip until it drives the economy into crisis. The Party governs by implicit consent of the People and by jailing a relatively small opposition. It receives that consent only so long as the people’s standard of living is rising, and their savings and other property are protected. If those conditions change, an urbanised, educated and well-travelled cognoscenti would lead hopefully-peaceful mass protests of such a scale that oppression is impossible. Call that bottom-up reform, or a Chinese Spring.
One way or the other, top-down or bottom-up, I believe that we will get there, and by 2047 China will be an open, democratic and truly prosperous country, with one “System”, the one that works. In the meantime, conditions in Hong Kong will probably get worse before they get better. In the second path, a mainland economic crisis followed by a Chinese spring would be accompanied by a period of economic disruption in Hong Kong. Whether you wait for the broad, sunlit uplands is up to you and depends on the alternatives available to you. In 2047, I will turn 82. I hope to be around to see it.
Thank you for your attention.
© Webb-site.com, 2018
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