The real economy

April 17, 2019 18:33
Hongkongers hope to buy their own homes, which are “brick and mortar”, but the housing bubble resulting from an overheated property market is “virtualized”. Photo: CNSA

The Outline Development Plan for the Guangdong-Hong Kong-Macao Greater Bay Area has mentioned the term “real economy”, but hasn’t bothered to explain the term.

Over the years, mainland media have often drawn a distinction between businesses with physical presence as well as tangible products and the real economy.

However, there is also a view in the mainland that the real economy should include both visible products and invisible services.

Mainland economic experts have often attached overriding importance to the real economy, and called for vigilance against the “virtualization” of the “brick and mortar” economy.

During the annual session of the National People’s Congress in Beijing last month, President Xi Jinping met with a delegation from Fujian province and told them that businesses should not only focus on making profits but also remain down-to-earth so as to contribute to the real economy.

But while Chinese entrepreneurs are obsessed with keeping their tangible businesses even at the expense of profits, their western counterparts tend to believe that doing business is all about making profits, and therefore won’t hesitate to sell their “real” businesses for big bucks.

As Thomas J. Dunning, a 19th-century British trade unionist, once said, “with adequate profit, capital is very bold. A certain 10 percent will ensure its employment anywhere; 20 percent certain will produce eagerness; 50 percent, positive audacity; 100 percent will make it ready to trample on all human laws; 300 percent, and there is not a crime at which it will scruple, nor a risk it will not run, even to the chance of its owner being hanged.”

One textbook example of how western entrepreneurs often give priority to making profits over keeping their “B&M” business operations is the 2015 merger of Kraft Foods and H. J. Heinz to form The Kraft Heinz Company, a high-profile deal facilitated and spearheaded by a private equity firm and a prominent stock market speculator.

A managing partner of the private equity firm was later named chairman of the new company.

Unfortunately, the new company has sustained huge financial losses as its revenues have been on a downward trajectory since February this year.

In the case of Hong Kong, people often come across a situation where the real estate and the financial sectors, the two main pillars of our economy, are both “physical” and “virtual” at the same time. The boundary between real and virtual economies then isn’t always that clear-cut.

For instance, Hongkongers hope to buy their own homes, which, theoretically speaking, are purely “brick and mortar”, but the housing bubble resulting from an overheated property market undoubtedly becomes “virtualized”.

And once the housing bubble bursts, homeowners may not only lose their physical properties but may also trigger a financial crisis.

Therefore, unlike in Hong Kong, mainland authorities have repeatedly stressed that homes are for living, not for speculating purposes, and have remained highly alert to the “virtualization” of the financial sector.

This article appeared in the Hong Kong Economic Journal on April 15

Translation by Alan Lee with additional reporting

[Chinese version 中文版]

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Former Secretary for Home Affairs