Economic Issue Group Policy Recommendation s

1. Economic Issue Group Policy Recommendations • Revise the Land Policy • To Reduce Costs of Business • In order to Diversify the Economy • Leading to an Innovation-driven Economy Part One • Current situation of the land market and the economy Part Two • Recommendations to become an innovation-driven economy

2. Part One：Current Situation • All land are leased from the Government, it is a monopoly and supply would not increase with price. • Monopoly would pass on to the property market if Government does not actively introduce competitive elements into the property market after sales. • Currently, there are not enough competitive elements in the property market.

3. Observations that illustrated the lack of competitive elements： • Market force cannot help to establish a standard on the computation of usable floor space. • Market force cannot help to eliminate the unfair practice of “internal sale”. • Public service companies that change, say bus depots to property developments do not need to submit the land to open competition.

4. Revenue from land is a major source of Government revenue. • Small/medium enterprises and middle class are supporting this revenue through rental and mortgage payment. A form of quasi-land tax. • Property developers’ profit seems a form of tax collection charge. • A non-competitive property market raised this quasi-land tax. • It increases the costs of business (rental and salary). • Not only a non-competitive market, but also an intervened market. • In 2002, Government intervened the property market through nine specific measures. • Property market price was not a fair market price.

5. In more details, a pegged exchange rate system uses the whole domestic economy for adjustment. • We have to inflate/deflate the economy as money supply increase/decrease. • Nobel laurel Paul Samuelson explained this situation of Hong Kong in his book.

6. Hong Kong went through this deflation adjustment during 1998 to 2004. • Property vested interests lobbied the Government into intervention in 2002. • Retail, labor and capital markets completed the deflation adjustment, but not the property market. • Also caused a re-distribution of wealth from the deflated markets to the property market, further polarizing the rich and the poor.

7. 2002 intervention Without intervention market may adjust more, reducing costs

8. To sum up, HK’s property price is： • not a competitive market price, and • an intervened price Therefore, it is not a fair competitive price The competitiveness report of the World Economic Forum assigned a lower than overall ranking to HK’s anti-monopoly sub-index（ｌ２overall vs ３７sub-index）

9. Part Two：Recommendations Harvard Professor, Michael Porter suggested that an innovation-driven economy is key to competitiveness. It needs： • A high level of business sophistication, and • A high level of innovation The competitiveness report of the World Economic Forum put this sub-index lower than HK’s overall ranking（１２ overall vs ２ｌin this sub-index）。 We believe that the unfair price of property discussed above is one of the hindering factors in expanding our business sophistication and innovation.

10. Since property and salary (staff need to pay mortgage) expenses are key expenses of small/medium enterprises. We recommend developing a fair competitive market price for the property in order to facilitate the development of innovative small/medium enterprises. These include： • Small/medium computer software development services. • Small/medium design and quality control enterprises. • Small/medium finance, accounting and legal services. • Small/medium logistics and international trade services. • Small/medium human resources and training services. • Small/medium market research and promotion services. • Commercialization of research projects of universities.

11. To develop a fair competitive market price for the property. The Government needs to： • Increase land supply. • Increase the number of participants. • Eliminate market manipulations. That is to drop the “high land price” policy, reducing the quasi land tax of the people. This may reduce land revenue of the Government. Therefore, tax reform is needed. We recommend including Property Capital Gain Tax into the tax reform consultation.

12. In conclusion, our policy recommendations are： • Revise land policy and drop the “high land price” approach in order to reduce the quasi land tax. • Leading to a reduction in costs of business and expanding business sophistication through promotion of small/medium enterprises. • Small/medium enterprises can increase the diversification and innovation of HK leading us into an innovation-driven economy.