Wrong Kong Part 2

Rigged Markets

If you read the breathless reports from think tanks like the Heritage Foundation, you would think Hong Kong is bastion of free market capitalism. It’s often voted the “freest economy in the word.”

Look at the criteria. The score is based on lack of import duties and how easy it is to start a business. That’s true. Hong Kong charges duties on just four items and I registered a sole proprietorship with one visit to a government office that took less than an hour.

What those surveys ignore is freedom of competition in the local market. Here, Hong Kong is an oligopoly with generally just two “competitors” in most sectors owned by one of five family conglomerates.

Incredibly, some people can give as much as 80 percent of what they spend in a day to Li Ka-shing. They pay a mortgage on one of his apartments, he provides the electricity and mobile phone network, his son’s company provides the cable, they take one of his buses to work and shop at his pharmacy and grocery stores.

Cartels are everywhere in Hong Kong.

The concentration ratio measures the combined market share of a leading cluster of businesses in a market.

A rule of thumb is that an oligopoly exists when the top five firms in the market account for more than 60 percent of total market sales. In Hong Kong, you’re generally hard pressed to find three firms in a market.
Supermarkets are a duopoly, one whose pricing power allows the chains to charge higher prices for the same products in some of Hong Kong’s most deprived areas. Drug stores are a duopoly. Buses are a cartel: high-priced, mostly cash-only, running shoddy, dirty diesel vehicles. Drivers earn a pittance and work 12 hour days. Lack of proper rest has contributed in several high fatality crashes in the last three years.

The Li family controls two of the four mobile operators. Electricity is provided by two, expensive monopolies that handle everything from generation to distribution. The container ports are an oligopoly, with the world’s highest handling charges.

Add in a shady stock market with 1970s-style governance, and a taxation system that tycoons circumvent by taking out their money through tax-free dividends.
(For those with more free time, the story of how Li Ka-shing made his girlfriend, Solina Chau, a billionaire with stock market shenanigans is most illuminating.)

Hong Kong has had a Competition Ordinance and a Competition Commission since 2012. It has done nothing.

While foreign products may be welcome, foreign companies setting-up shop is not.

French supermarket giant Carrefour which has successfully expanded around the world suffered its first ever setback in Hong Kong and left the market.

They wanted to open the kind of bright open supermarkets Mainland Chinese and Taiwanese have flocked to (as opposed to Wellcome and Park’N’Shop‘s crowded, dingy stores like the photo in the section above.)

However, Carrfour was unable to lease space. They had to settle for one location in Chai Wan, a place locals consider the middle of nowhere. Li Ka-shing, who owns one of the cities two ubiquitous supermarket chains called Park’N’Shop, also controls something like 40 percent of the local retail rental market.

From the South China Morning Post:

'In Hong Kong, we had a shortage of places and we had no sites. It was not possible to find new locations and we wanted to become a significant size in Hong Kong,' a Carrefour official said.
However, retail industry sources speculated whether other retailers had effectively blocked discounter Carrefour from renting larger sites to stop its expansion.

Carrefour also struggled with suppliers, who refused to deliver to their stores. Given Li’s Park’N’Shop and Dairy Farm’s Wellcome command 85 percent of the market, it’s not hard to imagine who pressured them not to sell to Carrefour.

Rents make up a third of the total costs of Hong Kong’s small enterprises, which is very high by a global standard. A maximum of 20 percent is the usual rule-of-thumb.

Bad as all this is, the worst cartel is the residential property market dominated by the “Five Families.”

Nearly 50 percent of all residential properties sold in Hong Kong are built by the city’s five biggest developers: CK Assets of the Li family, SHKP of the Kwoks, Henderson Land of the Lee family, New World Development of the Chengs and Sino Land of the Ng family. Globally, that is an unprecedented concentration.

Housing is where rigged markets have made life in the city unbearable. We’ll explore that next.