Investing in Hong Kong

Mar 9th, 2007 | By Christopher Hancock | Category: International

Money goes where it’s treated best.
– Wriston’s Law

I submit the story of arguably the finest leader the 20th century ever produced. His greatest quality: He didn’t intervene. He called his approach “positive non-intervention.”

It’s the story of a man whose legacy legitimized the laissez-faire economic policies of Milton Friedman and the boys at the University of Chicago. According to the Chicago approach, intervention almost always did more good than harm.

Our hero set the bar as Hong Kong’s financial secretary throughout the 1960s.

The Greatest Leader the World Has Never Known…

Sir John James Cowperthwaite was born on April 25, 1915 in Britain. Before joining the Colonial Administrative service in Hong Kong in 1941, Cowperthwaite studied economics at St. Andrews University and Christ’s College in Cambridge.

Cowperthwaite arrived in Hong Kong immediately following World War II. That was a good thing. Roughly four years of Japanese occupation had taken its toll.

Manufacturing ceased. Inflation soared. Tens of thousands were cast in the streets. Many more were deported to the Mainland.

By the war’s end, only 600,000 of the original 1.6 million citizens remained.

Unlike most British colonies at the time, Hong Kong didn’t receive its freedom immediately following the war. The reason was simple: Hong Kong sat right next door to communist China.

So while the Brits sat at home channeling their energy around their newly enlightened pampers-to-pampers welfare state, Cowperthwaite stepped back. He took his hands off the Hong Kong economy.

Personal taxes were kept at a maximum 15%. Government borrowing became an oxymoron. There were no tariffs or subsidies. He managed to reduce the red tape to a level on which a new company could be registered with a one-page form.

Cowperthwaite’s intrinsic distrust for government enabled him from preventing even the highest bureaucrats from keeping figures on the rate of economic growth or the size of GDP. His reason… “If I let them compute those statistics, they’ll want to use them for planning.”

In his very first budget speech, he said: “…in the long run the aggregate of decisions of individual businessmen, exercising individual judgment in a free economy, even if often mistaken, is less likely to do harm than the centralized decisions of a government; and certainly the harm is likely to be counteracted faster.”

During his “do nothing” tenure, the island only six times the size of our nation’s capital — sans any natural resources of which to speak — witnessed a 50% rise in real wages, and a two-thirds fall in the number of households in acute poverty. Exports grew by an average of 13.8% a year.

To put these numbers in perspective, consider this. From 1960 to 1996: Hong Kong’s per capita income rose from about one-quarter of Britain’s to more than a third larger.

As Friedman himself pointed out, “Compare Britain — the birthplace of the Industrial Revolution, the nineteenth economic superpower on whose empire the sun never set — with Hong Kong, a spit of land, overcrowded, with no resources except for a great harbor. Yet within four decades the residents of this sit of overcrowded land had achieved a level of income one-third higher than that enjoyed by the residents of its former mother country.”

Thank you, Sir John.

So while the 20th century history books exalt the purveyors of active Government intervention…names like Atlee, Keynes, Monnet, Roosevelt, and Wilson, I offer you this:

As we said before the very first paragraph, money will flow where’s it’s treated best. And I think you’ll be hard-pressed to find any other place in the world that treats money better than Hong Kong.

The highest tax bracket comes in at 17%. Individuals are only assessed on annual employment income. Dividends and capital gains are not taxed. Real estate assets may be passed down generations without any tax liability whatsoever. And like many progressive tax systems, Hong Kong grants allowances for certain deductions like charitable contributions.

When you consider Hong Kong provides arguably the world’s greatest municipal services in a relatively crime free environment, you’ll be hard pressed to find a more favorable tax policy anywhere in the world.

I’ll bring you more on some potential offshore small-cap plays next week. They’re arguably the best values in the world at this time…

Sincerely,
Christopher Hancock
March 9, 2007

Christopher Hancock

Christopher Hancock lives and breathes emerging markets. He travels extensively and utilizes his contacts across the globe to recommend the best international investments in the world. After working with Citigroup in Hong Kong on the challenges and opportunities associated with the forthcoming RBM flotation reform, Christopher left many of his friends behind and decided to return to the States to pursue a career in equity research.

Special Report: Imagine Getting Rich as Ignored Stocks Soar- How you could turn $200 into $1.2 million!