Self-Inflicted Policy Errors Put Hong Kong's Economy at Risk

Self-Inflicted Policy Errors Put Hong Kong's Economy at Risk
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Should IBM and other international cloud computing enterprises move their Asian businesses away from Hong Kong?

The prolonged US-China trade dispute, coupled with anti-government protests, could trigger an exodus of capital and talent from Hong Kong. Last October, Goldman Sachs estimated that Hong Kong may have lost US$4 billion of capital to Singapore. More recently, the Bank of England claimed that the unrest in Hong Kong has led to as much as US$5 billion of capital outflow from investment funds since April 2019. Given the challenges these outflows create, it is stunning that Hong Kong is actually adding to capital flight with a bizarre policy to undercut one of its real market strengths.

Today, the world's most valuable resource is data. This is a windfall for Hong Kong where, in additional to well-established infrastructure (e.g., nine regional and transpacific submarine cable systems, and abundant and stable power supply), the “one country, two systems” principle has played an important role in making Hong Kong an attractive place for data center development. International tech companies and cloud computing enterprises have considered Hong Kong as a strategic location, and a secure jurisdiction, for data storage. The current legal case of SUNeVision v. Hong Kong Science and Technology Parks Corporation (HKSTP), however, may highlight a potential public failure in this key industry.

The dispute is over property rights due to potential subletting arrangements. SUNeVision, the plaintiff, is a company that has invested in a Hong Kong data center, and then provided data service including transit and storage to customers,  HKSTP, the defendant, is a government-owned corporation that operates industrial estates that can be used as data center on land granted by the government at a nominal premium. It is an ambitious and far-reaching assertion of state rights more commonly associated with China than Hong Kong.

According to the admission policy for data center operators, at all times the right of access to the premises shall remain within the exclusive control of the grantee chosen by HKSTP. In addition, the grantee is not allowed to sublet or otherwise assign possession of the leased premises; third parties are banned from license or allow third parties to occupy part of the premise. For example, as revealed during the court case, NTT Communications Asia Ltd confirmed, in writing, that in their Tseung Kwan O Industrial Estate’s data center (TKODC), “there has never been subletting or licensing parts of the premises of NTT at TKODC to any customers for their exclusive use and occupation, including but not limited to any leading international search and cloud computing enterprise as well as financial institution. And all customers at TKODC understand and agree that NTT and HKSTP have the right to enter into the premises and NTT has control over customers' access rights to the premises.” Other data center operators, such as Global Switch, also had similar written confirmations to HKSTP. In other words, the existing industry practices in Hong Kong allow a government-owned corporation and its chosen data center operators (e.g., Global Switch, a data center provider under Chinese ownership) to have access rights to premises where the most valuable resource in the world is stored. In a time of growing international rivalry between China and the US, customers such as IBM may reconsider Hong Kong as their Asian data center unless the data security can be addressed via more transparent contractual arrangements.

As legal scholars have long recognized, compared with the civil-law tradition, the common-law tradition tends to be less interventionist and more supportive of private economic arrangements. This is indeed one of the key drivers of Hong Kong success as a common law jurisdiction.  The attraction of capital has tended to support the policy of “one country, two systems.” Economic research has backed the political intuition, showing that common-law systems are more protective of outside investors, including both creditors and shareholders, than civil-law societies. The latter tend to be more protective of insiders and to give outside investors fewer rights. In other words, legal origins affect legal rules, legal rules affect the development of property rights, and the development of property rights affects the development of financial markets. It is no accident that Hong Kong (with its common-law system), but not Macau (with civil-law), is known around the world as a leading international financial center.

Hong Kong has reaped rewards from its location and its convenient history of common law.  But those advantages are now at risk due to self-inflicted policy errors. The data economy demands a new approach to competition law that enables contracts to be respected. To remain an international financial hub in the modern Internet economy, the importance of secure private property rights to data as well as other valuable resources cannot be overstated.



Kevin Tsui received his PhD in Economics from the University of Chicago. He is an Associated Professor in the John E. Walker Department of Economics at Clemson University.  

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