An Informal Survey of Hong Kong
I'm just returning from a short, but amazing trip to Hong Kong. I went to see firsthand how markets in this area of the world operate (and I had a Global upgrade from United Airlines that was expiring at the end of the month). I have a cousin who has been living there for over 15 years and I wanted to not only catch up with him, but also to 1) learn his perspective on the Hong Kong economy, and 2) start exploring if any of the quantitative analysis he does as the head quant and partner in an algorithmic trading firm might carry over into my constant striving to better analyze and optimize lower middle market private companies.
Many thanks to him and his family for hosting me and giving a better insider view of the city than I otherwise could have.
Here, I’ll focus on my reflection of the economy and the trip itself. I have yet to dive deeper into how the automation involved with algorithmic trading can assist private company analysis, but a white paper on analyzing lower middle market private companies will be available soon.
Insights from 2 days in Hong Kong
At the beginning of the microeconomics and macroeconomics classes I’ve taught, I bring the students through a survey of the types of economic systems in our world. One of our references is the Index of Economic Freedom (jointly published by the WallStreet Journal and the Heritage Foundation). Every year that I’ve been referencing that index (at least ten) the economy that has been ranked as the most free on the planet has been: Hong Kong. (This index also piqued my interest in Chile, which I've blogged about before. It is regularly in the top 10 in the world and by far the highest in Latin America, but I’ve been anxious for years to see first-hand what the freest economy on the planet looks like).
Hong Kong is not utopia as no place on earth ever will be. While it has flaws just like every society does, things there do work very well and the stark contrasts between Hong Kong and mainland China provide an almost textbook example of the benefits of open markets and rule of law.
What I saw was an amazing blend of old and new and East and West. My Iphone tells me that Hong Kong has the most skyscrapers in the world and my eyes gave me no reason to doubt that claim. I contrast Hong Kong to my visits to Santiago and other cities I’ve visited which also experienced amazing economic progress in recent decades (albeit others were on a smaller scale). Santiago has a distinct modern business district which has miles of modern structures and except for the Spanish coming out of the mouths of the locals, one would think they are in the United States. Hong Kong, however has a modern skyscraper or two followed by a series of fifty- to sixty-year-old much smaller buildings with various animals (or parts of animals) hanging in the front window, traditional Chinese medicine herb shops, and massage businesses. I could climb to the top of a mountain and look down on hundreds or thousands of skyscrapers and then walk into a hole-in-the-wall restaurant at the base of those buildings (that looked like it had been there long before technology to build the skyscrapers even existed) and enjoy Green Tea and Dim Sum. There was no confusion about what part of the world I was in.
The infrastructure is reliable and many functions usually reserved for government are run by private businesses. Even the service that runs the train from downtown to the airport is a private company. And they’ve needed to continue to offer more innovative service to their clients in order to remain profitable. One service, which is the only I know of in the world, is downtown check-in for your flight. If you arrive several hours early for your flight. You can check in at their downtown office and hand over your bags right there. They will make sure your bags get on the plane while you are free to enjoy downtown bag-free until it is time to take the train to the airport.
Business after business was private and the entrepreneurial spirit was in the air. There is even a chain of Hong Kong diners that is publicly traded. While there is a public health insurance system, it is unreliable and nearly everyone in the middle class or above uses private health insurance and a network of private hospitals and doctors.
There was almost no homelessness, begging on the streets, or crime. In most areas women can safely walk the streets alone in the middle of the night. Some countries accomplish this by strict authoritarian rule and harsh penalties for crime (such as caning for graffiti or death for drug possession). Hong Kong has done it by a combination of culture and an economy with minimal regulatory interference. This has led to nearly full employment year after year, recession or no recession. Causation or correlation? I was witnessing a very strong correlation between open markets, full employment, and low crime. Hmm?
While Hong Kong’s history and present economy still lead the world in economic freedom, not everything is coming up roses for them. When the British transferred the region toChina in 1997, part of the agreement was that China had to leave it alone for 50 years. There are only 30 years left and China has already started to encroach by controlling who can run on Hong Kong elections. In 2014 there were massive student protests against this. And on the day of my arrival China had just disqualified a young woman from running for a post in the Hong Kong legislature because they believed she had an independence position. They gave her no opportunity to explain or clarify her position, they simply removed her from the election without even contacting her. As of my departure no protests had developed, but locals were not happy about this.
Even if the mainland CCP government does discipline itself for another 30 years, there is a large question mark about what will happen then. And even though 30 years is a long time, that is about the time horizon used when planning real estate investments. And when people in their 30s are thinking about where they and their families would like to be when they retire, that question mark might start to make them look elsewhere. It will be interesting to see how things unfold in the upcoming decades. It is certainly my hope that China will not only preserve this anomaly of economic freedom on the planet, but also spread it for the flourishing of all mankind.