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What Hong Kong Tells Us About China

China's growing role in the global economy can be felt in Hong Kong's booming economy.



) - I've spent the last couple of days in Hong Kong, the gateway to the Orient. Starting Thursday, I will embark on a 10-day trip in China meeting with different management teams from existing portfolio companies and prospective investments.

The companies include

Universal Travel



Orient Paper



China Agritech



Puda Coal



Shengkai Innovations

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China Wind Systems

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, and

Fuqi International



The time in Hong Kong has opened my eyes to some of the dynamics going on in this city's economy and its relationship to mainland China, which are useful for any investor to keep in mind.

Hong Kong is booming at the moment. Recession? What recession? Any American looking to board a time machine and travel back to the glory days on 2006 should take the next flight to this city.

If you've grown weary about hearing the latest Case-Shiller data on housing and how foreclosures are about to start increasing again, you might find it jarring to walk around Hong Kong and read posters on real estate agency windows advertising dark and dirty 1,600 square- foot apartments going for $3 million to $4 million.

Everywhere you go, you see advertisements for some new extravagant condo building being built. People here like to demonstrate their prosperity, often by wearing high-end brands proudly. On a stroll last night through a prosperous section of Kowloon, I was startled to see a line to get into the biggest Louis Vuitton shop I've ever seen. Yes, there was a line of people waiting to get into a store so they could spend $10,000 to buy a bag.

I now understand why Vancouver and Toronto are experiencing mini-housing bubbles at the moment: People from Hong Kong are going up there to scoop up investment properties at a fraction of the price they would pay here.

This real estate boom is driven by the constricted supply of housing on the small island, the low marginal tax rate of 15% (how's that for a mortgage tax deduction?), and most importantly, newly wealthy mainland Chinese teeming over the border every day eager to spend their money in Hong Kong.

You see the mainland Chinese by the busloads in Hong Kong. They're easy to spot. They're following the shouting guide with a neon pink flag. They look as pleased as punch to be here. They can't stop taking photos -- or spending money.

I asked a colleague why so many would be coming to Hong Kong versus Tokyo or some other major city. They replied that they're happy to come here because it's still China. (Technically, Hong Kong is now a "special administrative region" of China). But it's a big city that still sells goods -- especially high-end goods -- at much lower prices than back home.

For example, if you come to Hong Kong to drop some cash at Tiffany, you will likely spend 20% less than you would at the Shanghai Tiffany shop. That's because China places a tax on Tiffany's goods that are brought into the country.

I was confused why the Chinese government would allow the different tax rates to exist for the mainland and Hong Kong. My friends explained to me that this gets at the whole question of why not much has really changed since China took over Hong Kong from the British in 1997.

At the end of the day, the Chinese government is proud of Hong Kong and its place as one of the financial centers of the world. With places like Singapore constantly looking for an edge to attract new banking and hedge fund business, China wants to keep Hong Kong's central position in the region. This means keep it as is.

It's ironic that a communist country like China is supporting the greatest example of free market capitalism in the world. Milton Friedman often pointed to Hong Kong as a model for the U.S. to follow.

There is no minimum wage here. In fact, while some have started to call for the establishment of a minimum wage for what would be the equivalent of $2 to $3 an hour, there has been a strong blowback of resistance, with many saying it would force many employers to lay off people and automate certain jobs.

There likely will be a housing crash -- or correction, if you want to be more polite -- at some point. There have been big ones in Hong Kong before, such as after the SARS outbreak in 2003 and in 1990. But, for now, Chuck Prince would like it here because folks are still dancing while the music plays.

What's undeniable as you walk through the streets here is the dominant effect of China's growing economic force on this city and the world. Millions of Chinese are getting rich, and they like it. They're also ready to spend it. That's good for Hong Kong and good for the world.

At the time of publication, Jackson was long Universal Travel, Orient Paper, Puda Coal, Shengkai Innovations and China Wind Systems.

Eric Jackson is founder and president of Ironfire Capital and the general partner and investment manager of Ironfire Capital US Fund LP and Ironfire Capital International Fund, Ltd. You can follow Jackson on Twitter at or @ericjackson