The theory of factor price equalisation - often regarded as a somewhat dry and dated economic concept - offers an interesting approach to recent developments in economic integration between Hong Kong and the Mainland. Part 2 of this discussion explains why.
Land is, of course, physically immovable between economies. But as I mentioned last week, people (as consumers or investors), who need to be housed in property built upon land, and capital for purchasing land and property are mobile. (This mobility is asymmetric, in that it is open to the people of Hong Kong and not the Mainland.) As this mobility is manifested in homes being moved to the near Mainland, market forces will work towards price equalisation for land, notwithstanding the geographical boundaries dictating its immobility. We have been seeing this for some time. In fact, given the differences between the two economies, under "one country, two systems", the current price differential between Hong Kong and near Mainland in land and property may already be near equilibrium. But, clearly, we are talking about a dynamic situation. Policy changes may vary the magnitude of the price differential that can be justified by the differences in the two economies and therefore shift that equilibrium point, necessitating further price adjustments. I am sure policy makers are acutely aware of this and of the short-term as well as long-term implications for such further adjustments.
Labour mobility between the two economies is a delicate but clear enough subject in terms of its pros and cons. So I do not intend to say much, other than that there is, realistically, little political support for substantial importation of labour, particularly at a time when unemployment is a big issue. Immigration from the Mainland has always been a feature of Hong Kong and I am sure its effect on factor price equalisation in respect of labour is among the many, perhaps more important, factors that have already been taken into account in formulating current policy. However, it seems desirable that higher priority should be given to those with substantial resources that can be readily translated into demand in a manner helpful in alleviating the pain of deflation in Hong Kong.
Unlike land and labour, capital is something for which we undoubtedly would like to see more mobility. The consequential factor price equalisation for capital is not a matter of concern. In fact we would welcome it. This is not so much in respect of the equalisation in price of capital in terms of nominal interest rates. Monetary policy considerations would dictate whether this would occur, not the mobility of capital. What is of clear benefit to Hong Kong is the equalisation in terms of the return on capital, as measured for example by the price/earning ratios of equities and other financial and physical assets. Regrettably, there is, once again, asymmetry in mobility that inhibits this process. There is much greater mobility for Hong Kong capital than for that from the Mainland.
We should, therefore, continue to work hard to enhance mobility of capital from the Mainland. In doing so we should understand that this is not exactly an easy subject for the Mainland to handle, involving as it does difficult questions about exchange rate policy and convertibility of the currency, made more difficult and risky by the ever-increasing potency of international finance. Yet capital mobility, particularly from the Mainland to Hong Kong, in view of our increasingly close economic relationship with the Mainland, is becoming more and more difficult to control. Recognising this, a realistic strategy for the Mainland authorities may be, as I have been advocating, to formalise channels whereby the inevitable flow can be legalised and monitored, and regulated if it is considered desirable to do so.
Joseph Yam
22 November 2001
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