Jonathan Cheng –  Friday, September 15, 2006

The apparent abandonment of Hong Kong’s laissez-faire ideology is quickly growing into a crisis of confidence, with one prominent party leader demanding the chief executive fully explain what he meant when he said that “positive nonintervention” was dead – and had been for some time.

Civic Party chairwoman Audrey Eu Yuet-mee Thursday fired off an angry letter to Donald Tsang Yam-kuen.

“Before abandoning so fundamental a philosophy of governance, was there any public consultation or in-depth study?” Eu wrote. “Have you considered the potential damage that is done to Hong Kong internationally … and have you, or those advising you, considered what message this episode sends to international investors?”

But Steven Hess, vice president and senior credit officer at Moody’s Investors Service in New York, said there was likely some “over-reaction” to Tsang’s words.

Hess, who monitors Hong Kong for the credit rating agency, said the government was unlikely to change its ways overnight. Even before Monday, Hess said, Hong Kong government policy was always “pragmatic” – neither totally free market nor interventionist.

But Hess did suggest he planned to follow up on the remark.

“On our next visit to Hong Kong, we may pose the question to government officials as to what [Tsang] was referring to, but there may be some clarification in the meantime,” Hess said in a phone interview.

Eu’s sharply worded letter came in response to what seemed to be an off-the-cuff announcement Monday from the territory’s top official that “positive non-intervention,” a principle that has guided Hong Kong’s economy for decades, was no more.

Tsang dropped that little nugget when asked at a press briefing about any changes to the government’s policy after Monday’s high-level economic summit.

“Everybody says Hong Kong has a `positive non-intervention policy,”‘ Tsang said.

He noted the policy was devised by the colonial government “a long time ago,” and added: “All along, we have never said we’d made it a blueprint for our economic development.”

Those comments came as a bombshell to many investors and economic observers, but Eu’s letter – which made pointed reference to “the new interventionist policy” – marks the first time any political party has formally waded into the debate.

Though Eu’s letter is brief, it manages to pack in a rapid-fire series of 16 questions, demanding explanations for when, why and under what circumstances the policy change was made, as well as the implications a new ideology might have for the government and the territory’s economic fortunes.

She also asks how “positive non-intervention” differs from the “big market, small government” principle the administration says it still adheres to.

The Chief Executive’s Office issued no public response Thursday to Eu’s letter.

Positive non-intervention, crafted during the 1970s by then financial secretary Sir Philip Haddon-Cave, provided the laissez-faire bedrock for Hong Kong’s soaring growth, relegating the government to a backseat role, except in cases where that principle itself was challenged.

That philosophy has helped Hong Kong lock up the top spot for many years on the two major indices of economic freedom, both compiled by American think-tanks.

Andrew Work, head of a local free-market think-tank, The Lion Rock Institute, described the government’s hands-off approach as “the keystone of our success.”

Tsang’s statement, he said, was “stunning.” And not in a good way.

“Now, every time the government launches a new tax or pushes a new industry like biotechnology or IT, people are going to realize it’s the advent of big government in Hong Kong,” Work said.

Not everybody is as worried about the impact of Tsang’s statement. Lawmaker Sin Chung-kai, the Democratic Party’s spokesman on the issue, described it as natural and proper for the government to intervene occasionally in the economy.

“`Positive non-intervention’ is just a term,” Sin said.

Liberal Party chairman James Tien Pei-chun, meanwhile, said he “fully supports” the chief executive, rejecting any suggestions the government was “interfering” with the economy.

Li Kui-wai, professor of finance and political economy at City University of Hong Kong, downplays the importance of the statement as well, but said Tsang’s ambiguity would put an even greater focus on the chief executive’s policy address next month.

Still, he says, it will not be easy for Tsang to simply “chuck out” an ideology as deeply- ingrained in Hong Kong as government non- intervention.

“I just don’t think the central government wants Hong Kong to go to a planned economy,” he said.