Placing Business Over Property Speculation

Business over Property

Bernard Hickey's latest piece has a very pertinent paragraph:

We need to be lending and investing more in businesses, particularly exporting businesses, to drive the transformation. That's not happening. The only part of the economy that is saving more and repaying debt is business.

Along with some extraordinarily, very hard to believe numbers:

A closer look at what is happening with saving and borrowing show that New Zealanders have yet to start repaying debt and saving. Bank lending to housing (property speculators) has actually risen by $8 billion to $181.3 billion in the past two years. Lending to business (weath and employment drivers) has fallen $5 billion to $72.3 billion over the same period and lending to farmers (property speculators) has risen more than $6 billion to $47.8 billion.

In Hong Kong the government here has come up with a way of counter-balancing the liquidity issues of the financial crisis and the insane property market with government guaranteed bank loans from the major trading banks. Along with 39,372 other businesses the firm I work for applied for one of these loans. Little did I know when applying for it in less than two years some HK$88,749,013,738.67 has been approved to borrowers. The budget is HK$100 million. A staggering amount in just 21 months. Even at New Zealand's current high exchange rate it works out to an injection into the economy of NZ$15,117,600,000. In real numbers $NZ15 billion. Or in other words, Hong Kong has pumped more money into small businesses in two years by way of guaranteed loans by more than the increase in lending in New Zealand on farms and residential property in the past two years. To do so it used stamp duty gains from sales of property driven by the recent boom, transferring wealth out of property into employment and wealth creating businesses.

How easy are these loans to get? Well only 306 (less than 1%) were rejected. The maximum amount of loan is HK$12 million, with a revolving credit of half that. I recall the forms took about ten minutes to complete and there were minimal accounts to collate in addition.

For those of you in New Zealand with small businesses employing many people but with recent liquidity problems, you will be going green with these stats.

The criteria follow:

Enterprises with substantive business operation (note 1) in Hong Kong and registered in Hong Kong under the Business Registration Ordinance (Chapter 310), except listed companies, lending institutions and their associates.

Other requirements

• the enterprise must have been in operation for at least one year on the date of implementation of the SpGS (i.e. 15 December 2008);
• Personal guarantee is required of the enterprise owner or, in the case of a limited company, shareholders together holding more than 50% of the equity interest of the enterprise;
• the enterprise must have no outstanding default in any authorised institution as defined in the Banking Ordinance;
• the loans should not be used for repaying, restructuring or repackaging other loans.

As a result many firms borrowed for the hell of it and used the money to do things they otherwise wouldn't to add value to their businesses. We built a server system. I've no idea how it works as it's all about computers and large bits of equipment but it was big and expensive. Government guaranteed reasonably cheap credit is probably in all likelihood responsible for many businesses not failing in the past two years and falling unemployment. In the meantime in the last two years have taxes risen? Nope, every year I have received a tax cut since arriving six years ago.

While this scheme has of course distorted the free market here it is an example of re-distributing income received in taxes from the increased wealth in the property sector into real small business who actually employ large amounts of Hong Kong people. It adds weight to Bernard Hickey's argument for land tax or a Hong Kong style stamp duty on transactions to raise funds in property boom times and redistribute it to the productive sector. The problem in New Zealand is that the very small in numbers, but powerful Farmers Union, Federated Farmers wouldn't have a bar of it. They want all their capital gains to themselves and all their tax deductions from interest on their excessive borrowing.

If however New Zealand is going to be more that a country that sells land to itself and foreigners, SME's with all the entrepreneurs and productive talent there are going to have to be either given a hand up or have obstacles to their success removed to level the playing field up against business and individuals who merely buy and sell up chunks of land.