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1. Authority to unveil plan to address HOS deficit

2. Remark is a classic

3. How to enrich the city: allow helpers to integrate

4. A pox on chicken

5. Lower land revenue is a reality. A consumption tax is the best alternative

6. Prospering in the China market is a matter of managing risk

1. Authority to unveil plan to address HOS deficit
Eli Lau, The Standard 1 March 2003

The Housing Authority will soon unveil an assets securitisation plan for its commercial building and car-parking assets, in an attempt to overcome deficit problems caused by the suspension of Home Ownership Scheme flat sales.

Acting Permanent Secretary for Housing, Planning and Lands Elaine Chung yesterday forecast the authority would face a cash deficit of around HK$5.5 billion by 2005/06.

She said a review of the financial arrangements to dispose of surplus HOS units, as well as potential divestment of the authority's retail and car-parking facilities had been started last year, and the study was going smoothly.

``As certain government departments will be involved in the arrangement we are unable to reveal details,'' Chung said. ``We will take the market response into account and make an announcement shortly.'' The authority's top officials attribute the negative cash balance to the reduction in flats offered and sold under HOS Phase 24A after the 10-month sales moratorium ended last June and the cessation of sales in November.

It is widely expected the authority will securitise its properties through a real estate investment trust (REIT) - which reportedly is to be released for consultation as early as next week.

According to a Hong Kong Economic Times report yesterday, the Securities and Futures Commission (SFC) would propose a 90 per cent dividend payout ratio of total rental income in the consultation paper.

Sources told the newspaper the SFC was also considering limiting the gearing ratio of the trust to about 35 per cent of total assets, to maintain a lower risk condition of the products.

Unlike other countries, the sources said the REIT's structure would probably not offer any tax concession because of the absence of dividend taxes in Hong Kong.

An SFC spokesman said details would be unveiled this month.

REITs are equities that allow investors to own a portion of a group of real estate properties or mortgages, and are well-regarded in most markets for their relatively low volatility compared with other financial assets. Rating agency Standard & Poor's has said the development of REITs in Hong Kong could bring long-term benefits to the current subdued property market.

Market watchers, however, believe family companies in Hong Kong are probably reluctant to lose control of some of their important property assets.

2. Remark is a classic
Letters to the Editor, SCMP 1 March 2003

Your remark in yesterday's editorial about our Chief Executive, ''Mr Tung has many strengths...The problem, or at least part of it, is the job itself which needs to be tailored to Mr Tung's competencies'' is a classic.

It deserves a place in history as Winston Churchill's remark about Clement Atlee: ''He is a modest man, who has much to be modest about.''

AUDREY EU, Legislative Councillor

3. How to enrich the city: allow helpers to integrate
CHRISTINE LOH, SCMP 1 March 2003

The government's new population policy is in effect an immigration policy. Like urban dwellers in many other cities around the world, Hong Kong people are marrying later and having fewer children than before.

Nevertheless, the population continues to increase as a result of new arrivals.

Major cities, such as Hong Kong, Shanghai, Beijing, Bangkok, Calcutta and Los Angeles, grow larger as they attract more people, creating urbanisation on a scale unprecedented in history. The urban magnets pull together clusters of population that in settlement terms become regions.

Hong Kong, together with its neighbourhood, the Pearl River Delta, is increasingly recognised as a region, just as the Shanghai area is seen as a motor for the Yangtze Delta region and greater Los Angeles is for Southern California. There are many similarities in what each of the city governments has to deal with.

On such a scale, urbanisation and regionalisation face daunting challenges.

At one end are the intense economic activities generated by these major cities to provide opportunities for people. At the other end are social challenges of having to cope with cultural diversity, the provision of adequate public infrastructure and services, and the ecological footprints created by the intensity of consumption and waste production. Urbanisation increases the flow of everything - people, capital, technology, cultures, lifestyles and ideas. Cities are attractive particularly for those who like to work and play hard. The rich live in style, the poor in slums, and the disparity in wealth can be seen most clearly in cities. Migrant workers come to find jobs away from rural areas.

Hong Kong's distinguishing feature is the real border that separates it from its hinterland as a part of "one country, two systems". Lifting the border altogether is not yet possible, so the government has to continue to decide how to regulate migration from the mainland.

The choice of who can come and settle is already fixed by the Basic Law.

The government is going to make it easier for others who do not qualify for permanent residence to settle here, based on their qualifications and wealth. Once they arrive, they can also eventually become permanent residents.

In the meantime, Hong Kong continues to need a strong supply of one type of worker - live-in domestic helpers. For the last three decades, these jobs have been filled by foreign workers. The chief secretary noted that even in times of deflation, the demand for them has not dropped. This group now represents 7 to 8 per cent of our workforce.

Our home helpers come from Southeast Asia, mainly the Philippines and increasingly from Indonesia. They have become a part of our social fabric and have enriched the diversity of this city. Their presence adds to Hong Kong's international flavour.

Indeed, one of our assets is the ethnic and cultural diversity of the people of Hong Kong. It is the most diverse of any Chinese city and hence it continues to sustain a high level of flows of all kinds. It is what makes Hong Kong interesting and different.

The proposal to impose a tax of $400 a month on the employment of foreign domestic helpers is a revenue-raising measure and we can argue about whether it is right or wrong to do so.

However, what the population policy does not address is why this group of workers cannot ever attain permanent residence in Hong Kong, whereas people coming to work in any other jobs can, after seven years.

Government policy could not be more explicit: no matter how long a foreign domestic worker has worked in Hong Kong, how well he or she is acquainted with the local culture, he or she will never be welcome as a member of this society.

There must be many migrant domestic helpers who have worked here for 10 or even 20 years. Some of them speak Cantonese well, and many are capable of doing other types of work, as their educational backgrounds show.

The foreign domestic helpers even have to abide by the two-week rule: once they have lost their job, they only have two weeks to find a new job or they must return home.

In discussing population and immigration policy, it would be a significant omission not to look at this group of 240,000 people as potential permanent residents rather than just a way to raise revenue.

The government's assumption that this group should not be allowed to integrate fully with our society needs to be challenged.

Is it racism, first and foremost?

Christine Loh Kung-wai heads Civic Exchange and is a former legislator.

4. A pox on chicken
FRANK CHING, SCMP 1 March 2003

Like most people, I had never heard of bird flu before 1997. Since then, of course, people in Hong Kong have learned a great deal about the avian flu, mainly because it affects chickens and, through chickens, may affect human beings.

The bird flu virus jumped the species barrier and infected 18 people in 1997, six of whom died. Since then, however, there have been three more outbreaks in the bird population.

By now, we have almost become accustomed to hearing about another outbreak of H5N1. Now, once again, the bird flu virus is feared to have crossed the species barrier, infecting and possibly killing humans.

This is getting to be like a bad movie. Hong Kong has been doing its best, cleaning out wet markets, vaccinating chickens and checking imported fowl.

But, as the latest cases show, there is no foolproof way to protect ourselves from the virus.

Why, I wondered, did this problem surface only in recent years? After all, we in Hong Kong have been eating chickens for generations. The answer, according to one medical expert, is that the chicken population has increased explosively as the human population increased.

Hong Kong's population grew from 2.2 million people in 1950 to 6.8 million today. And since we are better off than we were in the 1950s, we are eating better, and what could be better than a chicken dish?

Incredible as it may sound, we in Hong Kong consume a quarter of a million chickens a day. Most are home-grown, but 80,000 are imported from the mainland. With so many chickens in close proximity, it is not surprising that viruses can spread quickly.

How can we protect ourselves? Hong Kong has done a lot of cleaning up wet markets, but the problem persists. The virus is mutating so fast that vaccination is not practical.

The only solution is a change in lifestyle. We should give up expecting to eat fresh chicken as a matter of course. Frozen chicken, and chicken parts, are much safer. But it is difficult to change the habits of not just a lifetime, but of thousands of years.

I cannot tell the difference between fresh and frozen chicken, but there are those who insist that the taste is quite different, with fresh chicken being far superior to its frozen counterpart.

If the demand for fresh chicken dropped, the problem would be greatly eased. As it is, whenever there is a recurrence of bird flu, people shun chicken and eggs, both at home and in restaurants. This shows that, if need be, we can do without fresh chicken.

In the meantime, the case of Ko Yan-kit, who was sent home twice by Yan Chai Hospital, shows that our medical personnel need to be more sensitive to the possibility of the bird flu virus infecting humans.

The hospital authority absolved its doctors by blaming the patient, saying that he "had not mentioned the illness of his family members during consultation" on February 9 and 10. That is not good enough. Patients often do not know what information is relevant. It is up to the attending physician to ascertain the facts.

It was not until February 11, when Ko visited Princess Margaret Hospital, that he was admitted. But by then it was too late. He died of peunmonia six days later.

Ko's 9-year-old son visited Yan Chai Hospital on February 11, the day after his father was sent away for the second time, with similar symptoms: sore throat, running nose and mild fever. The hospital sent him home, too. The next day, he was admitted by Princess Margaret Hospital.

Fortunately, the boy has recovered.

Granted that bird flu symptoms are similar to those of an ordinary mild flu, doctors cannot dismiss people with such symptoms without questioning them closely about where they have been, whether they have been in contact with poultry, and whether other family members have similar symptoms.

According to the hospital authority, the doctors at Yan Chai Hospital did no wrong, since they provided treatment "according to the clinical condition of the patients at the time of consultation". The problem, of course, is that delaying treatment for a day or two may mean the difference between life and death.

The only sure way of beating the bird flu is to give up eating fresh chicken.

We have to be aware that chickens - long maligned for being cowardly - can be deadly.

Frank Ching (frankching1@aol.com) is a Hong Kong-based journalist and commentator.

5. Lower land revenue is a reality. A consumption tax is the best alternative
AYESHA MACPHERSON, SCMP 1 March 2003

Hong Kong's fiscal deficit problem could not have been summarised more accurately or concisely than it was by Civic Exchange, when the think-tank concluded that the real challenge is the future income of the special administrative region's government, not the size of its deficit.

In its report "The Budget and Public Finance in Hong Kong", Civic Exchange estimated that by using an accrual basis of accounting, the deficit figure for 2001-02 could have been as low as $31 billion - a significantly lower figure than the headline-grabbing figure of $63 billion recorded by the government's current cash basis of accounting.

Furthermore, by crediting value to some government assets that have been ignored in the cash basis of accounting, Civic Exchange calculated the net assets of the government to be around $998 billion as of last March 31, even after deducting a pension liability of $250 billion.

Again, this projects a far more rosy picture of the government's current state of finances than the official fiscal reserves figure of $372 billion. People will find it comforting to know that our true reserves are arguably much higher than the quoted official figure.

But hopefully the healthier figures estimated on an accrual basis will not divert attention from a key message from the Civic Exchange findings - that there is an urgent need to review Hong Kong's tax system.

Controlling public spending only provides part of the answer to the deficit problem. There is a limit on how far public spending can be reduced without further compromising the quality of public services. With deflation, rising unemployment and an ageing population, increasing demands will be placed on public services.

Equally important is the need for the government to recognise and deal with the defects on the revenue side.

Benchmarked against other developed jurisdictions, Hong Kong has a notoriously narrow tax base for its direct tax. About 60 per cent of profits tax income is contributed by the top 600 taxpaying corporations out of more than 50,000 corporations. Similarly, more than 60 per cent of all salaries tax is paid by a mere 100,000 individuals.

Moreover, in the past, Hong Kong has been heavily reliant on non-tax revenue sources - mainly from land sales and earnings from the investment of fiscal reserves. By their very nature, such revenues are susceptible to fluctuations in the market and hence are not capable of producing reliable and stable sources of revenue.

Land revenue, which accounted for 23 per cent of total revenue in 1997-98, fell to less than 6 per cent in 2001-02. With the government's self-imposed moratorium on land sales, the reliability of this source of revenue will be even more questionable in future. Similarly, investment income that produced about 18 per cent of total revenue in both 1998-99 and 1999-2000, produced only 0.5 per cent in 2001-02.

Civic Exchange has provided some possible methods for the government to generate more stable and reliable revenue. One of these is the introduction of a general consumption tax, such as a goods and services tax (GST).

Despite the common objection that GST is a regressive tax, there would be many advantages to introducing this tax in Hong Kong.

First, GST revenue is comparatively stable since it is based on consumption, which does not fluctuate nearly as much as income or asset values. A GST would assure the government of a source of stable income. Moreover, with Hong Kong's ageing population, the number of direct taxpayers is expected to decrease over time.

It is not by coincidence that a GST (or its equivalent) has already been adopted by more than 120 countries. According to the International Monetary Fund, about 70 per cent of the world's population now live in countries with GST regimes, which raise roughly one-quarter of all tax revenue.

Since a GST is already in operation in so many countries, Hong Kong can retain its competitiveness by adopting a low rate. At 3 per cent, it would generate an estimated revenue of $18 billion. At 5 per cent (which will be the rate in Singapore from next January), revenue would be about $30 billion. Hence, this tax has the potential to generate the additional revenue needed to plug the structural deficit.

Undoubtedly, the policy and the details of implementation must be thoroughly reviewed before a final decision can be made on GST (for example, whether any compensations should be given to pensioners and lower-income groups).

Acceptance of such a fundamental change to our tax system will also require good public education.

However, these obstacles should not stand in the way of modernising our tax system to cater for the demands of a modern society.

Financial Secretary Leung Kam-chung, in emphasising the seriousness of the deficit issue, has recently said the problem must be addressed now, no matter how unpopular it will be for him.

Mr Leung - here is your chance!

Ayesha Macpherson is a tax partner with KPMG Hong Kong.

6. Prospering in the China market is a matter of managing risk
STEVE VICKERS, SCMP 1 March 2003

China recorded another year of remarkable economic growth in 2002, despite a weak global economy. More impressive expansion of 7 to 8 per cent is forecast for this year, propelled by a rising flood of foreign investment and booming domestic demand.

China's growth offers lucrative opportunities to foreign companies, but they come with a complex array of business and political risks that could prove costly in terms of money and reputation. These risks affect all companies regardless of their size and experience in China.

Brand protection and the strategic management of intellectual property rights (IPR) problems remain some of the biggest issues, despite recent moves by China to beef up IPR protection. As much as 30 per cent of revenues of foreign firms are being lost to counterfeiting and well-known Chinese brands are also victims.

Crackdowns have done little to dent piracy. Counterfeit goods now account for a significant market share of many brands.

Multinational carmakers find it difficult to sell authentic parts due to competition from knock-offs. Some of the worst affected areas - where counterfeits dominate the market in many parts of China - are personal hygiene and food products, toys and electronic games, CDs and computers, cigarettes and car parts.

Alarmingly, many of the counterfeit goods are now being exported, with Japan a major market, especially for higher-quality fake luxury brand goods.

Much of the counterfeiting is done by criminal gangs, which make crackdowns difficult and sometimes dangerous.

Another major headache is the unreliability of distribution networks. But foreign firms are gradually being allowed to establish their own logistics and distribution networks as a result of China's entry into the World Trade Organisation.

Firms keen to expand quickly may want to buy up established distribution companies, but some of these may be rife with corruption, such as kickbacks, bribery and company staff acting in collusion with outside parties.

Smuggling is another serious problem, and firms can easily get into trouble with an increasingly assertive Customs authority that regards fines and other penalties as an important means of raising revenue. Several multinationals have been caught up in Customs and tax bureau crackdowns in the past few years and have been ordered to pay significant penalties for years of underpaid or unpaid dues and taxes.

But even foreign firms with their own distribution networks have been hit by serious cases of fraud that have crippled their operations.

One prominent consumer manufacturing company with an extensive logistics network investigated the activities of its distribution staff and found that they had produced fake spare parts and usurped the official distribution channels to sell the shoddy products to customers. As a result, the counterfeit goods had seriously undermined the reputation of the company's products. The firm had paid little attention to its distribution operations, allowing problems to grow until they threatened its activities throughout the country. Management had little choice but to dismantle and rebuild its logistics network, incurring enormous financial losses in the process.

Hidden costs and lack of transparency also remain a major headache. Although WTO membership should create more transparent legal and financial systems that would help foreign businesses operating in China, these changes are likely to take a long time to be institutionalised. In the near term, doing business in China will have many hidden costs that could damage foreign firms. These include administrative charges and red tape, corruption driven by the need to cultivate political and business connections, and the high cost of protecting intellectual assets in a nefarious environment.

Macro-economic and political risks can also be a challenge. China's economic reforms have produced increasingly fierce protectionism among provinces that are seeking to safeguard the development of their local industries. For example, the beer industry is tightly protected at the provincial level, and brewers in one province cannot sell to neighbouring provinces.

A range of other issues poses potentially serious threats to China's economic and social stability, especially the high level of bad debts in the banking sector which many analysts believe rivals the problem plaguing the Japanese banking industry.

Additionally, growing unemployment, especially in cities, has led to rising labour discontent. One foreign-owned manufacturer that had decided to trim its workforce in southern China found itself facing angry workers threatening to stage sit-ins at the factory. Instead of shutting down the factory, the company decided to search for a local buyer. This allowed the foreign investor to pull out without any embarrassing incidents that could have hurt its reputation with the authorities.

As China undergoes a profound economic transition, substantial and confusing changes are expected over the next few years. The regulatory environment, for example, will be especially chaotic as the authorities come to grips with interpreting and implementing the highly complex and voluminous rules of the WTO.

Clarifying the risks from the outset can mean the difference between being profitable or being in the red. Foreign firms must therefore carefully assess the risks and adopt appropriate controls and other risk-mitigation measures before executing any plans to start or expand operations in China. If companies do this, they are likely to find that China indeed bring them rich profits.

Steve Vickers is president and chief executive officer of International Risk, formerly PricewaterhouseCoopers Investigations Asia.