An economically illiterate leadership has decided to spray HK$80bn at HK's economy, benefitting employers who had no intention of making lay-offs, by paying the firms up to HK$54k per job. Some firms have even prospered during COVID-19. It's a wasteful way to return hoarded reserves to the economy, but all companies now have a legal duty to shareholders to eat this free lunch. They should resist any Government pressure to not collect it.

HK employers must eat this free lunch
9 April 2020

One of the greatest ironies in what until last year was ranked the "World's freest economy" is that its Government is led by economically illiterate people. The COVID-19 global pandemic and consequent near-shutdown of international and cross-boundary passenger traffic has undoubtedly impacted a lot of sectors in HK, including tourism and business travel, and it is arguable that even in a free market, businesses and people should be compensated for their consequential losses, particularly when the calamity has led to government-ordered shutdowns of some businesses such as bars and gyms, now extended to a 4-week period.

However, the major, HK$80bn component of what the HK Government announced yesterday goes far further than compensation - it sprays money indiscriminately over the entire economy, doing more for the needless and less for the needy.

Under the Employment Support Scheme (ESS), the HK Government will pay employers 50% of their wage costs up to a subsidy of HK$9k per job per month for 6 months, on condition that the employees are not made redundant. That is, they are paying employers to keep people in work even if the employer had no intention of laying people off. By contrast, the UK under its Coronavirus Job Retention Scheme (CJRS) is only paying compensation (80% of salary, up to GBP2,500 per month, for 3 months) in respect of employees have been "furloughed", that is, kept on the payroll but not working - for example, waiters or factory workers because the restaurants and factories are closed. It is a specific condition of CJRS that the employee cannot undertake work for the employer while on furlough, so it is automatically targeted at sectors which have suffered the most disruption.

HK's approach will result in windfalls for businesses that have been unaffected or even done rather well during the crisis. For example, the big supermarket chains employ thousands of low-wage workers. They've not only been busy restocking shelves after panic buying, but are also selling more food than usual as people are eating out less, and probably hiring more people for home deliveries. There is no real chance of redundancies there, but now the HK Government will pay the supermarkets a subsidy of up to HK$54m per 1,000 jobs (a bit less if they pay under $18,000 per month). The employees will get their usual wage, and the employer and its shareholders will benefit from the subsidy with a larger profit than they would otherwise have made.

Similarly, operators of neighbourhood convenience stores are probably doing rather well as more people are working from home and popping out for quick purchases of snacks and sanitizer. Other beneficiaries include retail banks which, along with insurance firms and stockbrokers, probably had no intention of mass layoffs and will now get the same windfall of up to HK$54k per employee. And note that HK, which is now only seeing around 5-10 local COVID-19 cases per day (the rest are imported and quarantined), is not in the same dire straits as the UK, but has chosen to make these subsidies last 6 months from the outset rather than 3 months, doubling their cost.

Given the Government's fiscally-insane policy, even if a company is not badly affected by COVID-19 or has benefitted like supermarkets have, the company must apply for its entitlement, because its directors have a legal duty to shareholders to maximise value. That includes legally minimizing their taxes and claiming every subsidy to which they are entitled, unless the cost is greater than the subsidy.

We were appalled to hear today that at least one company director has been called by a Government department and asked not to apply for its entitlement. Perhaps the Government is already beginning to regret the hasty policy-making, but such requests for collusion should be politely declined. We call on the Government to stop making such calls and make clear that it will not seek to intimidate companies into not taking the ESS. Asking companies not to take the money is no different to announcing a "voluntary" tax and then strong-arming companies into paying it in return for favours.

Webb-site founder David Webb has substantial shareholdings in a number of listed businesses which have thousands of HK employees. We hereby place the directors of these listed companies on notice that whatever sector they are in, they have a fiduciary duty to shareholders to apply for the ESS to maximise shareholder value - so do not even consider placing yourselves at risk of shareholder litigation and at a competitive disadvantage by not applying. Your competitors will apply.

There are far better ways to disgorge the over HK$1 trillion sucked out of the economy and into reserves over the last 22 years, but if the Government is going to do it this way, then we must all take what we can get. Look on the bright side - at least they are not building another bridge to Macau.

LegCo Approval

The package is of course subject to approval by the Legislative Council Finance Committee, but can you really imagine the legislators representing "Functional Constituencies", each of which has some candy in this cake, rejecting it? There were several other items in yesterday's package directly aimed at buying their support, such as a $50k handout for each small brokerage firm which elects the "Financial Services" legislator and a $30k per-licence handout for each owner of a licence for a taxi, non-franchised bus or private hire car in our road transport licence cartels. These licences should be uncapped and freely available to anyone who wishes to licence a vehicle for a token administrative fee, but they have become rent-seeking speculative investments and now the Government is supporting their value and pandering to the owners, because they elect the Transport legislator and 18 seats in the Chief Executive Election Committee.

©, 2020

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