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Liu Yefen leads the way up seven flights of stairs, past crumbling plaster and dripping pipes, to the Hong Kong home the 37-year-old migrant from China and her three sons occupy. Clothes festoon the metal-framed bunk bed the family shares in the 180-square-foot apartment, obstructing light from the only window.
Two miles south, Jane Guo’s hotel room at the five-star Kowloon Shangri-La overlooks Hong Kong harbor and the financial district—home to the world’s fifth-biggest stock market and the Asian headquarters for Goldman Sachs Group (GS), JPMorgan Chase (JPM), and HSBC Holdings (HBC). The 27-year-old head of an auto valet service in the mainland city of Guangzhou is in town to shop for Coach (COH) sunglasses and bags—and possibly a third Hong Kong apartment. She bought two already for HK$10.5 million ($1.34 million) in cash in order to gain Hong Kong residency rights.
The trading hub has thrived on a big-markets, small-government ideology. While that policy has helped make Hong Kong’s 7 million residents on average richer than those in the U.S. or Germany in terms of purchasing power, it’s also driving a wedge between the haves and have-nots as the surging cost of food, housing, and education widens Asia’s biggest wealth gap.
Hong Kong’s poor face unique problems. The city’s currency peg to the U.S. dollar, which has weakened against 16 other major currencies in the past year, increases the cost of the imported fuel, food, and goods on which Hong Kong depends. At the same time, mainland Chinese can obtain a Hong Kong passport and all the legal protections of a Hong Kong resident if they bring at least HK$10 million into the city; that went up last October from HK$6.5 million. About 8,000 Chinese have won Hong Kong residency this way.
Wealthy mainland investors not seeking residency are also buying Hong Kong real estate, forcing housing prices upward. Mainland buyers accounted for at least 38 percent of all new luxury home transactions in Hong Kong in the first quarter, according to a survey by the Centaline Property Agency. Far less affluent Chinese have been arriving, too. From 2006 to 2010 more than 220,000 mainland Chinese moved to Hong Kong under a family reunion program that sets a daily quota on the number of Chinese who can emigrate to the former British colony.
One of those migrants, Nay Leung, 49, says she gave up her job 10 years ago as a quality controller at a clothing factory in neighboring Guangdong province to seek a better life in Hong Kong. “When I left, everyone was happy for me,” says the mother of two as she stands on the back stairs of the housing block where she works part-time removing trash. “But my life here now is so bad. I feel more and more like I’m living like a beggar.”
“We welcome talent to Hong Kong to live here and create wealth for us,” the city’s leader, Chief Executive Donald Tsang, told lawmakers on July 15. “On the other hand, we also welcome our compatriots, especially the hundred or so mainland immigrants who come here each day for family reasons. The first group has the best money-earning ability, while the other has no bargaining power at all.”
Real wages in Hong Kong are lower now than they were a decade ago, as incomes failed to keep pace with rising rents, supermarket prices, and school costs. Across the border in Shenzhen, average wages are now ¥3,326 ($514) a month, according to the city’s bureau of human resources. That’s more than the poorest 10 percent of Hong Kong’s population earn. A record 1.26 million Hong Kong residents lived in poverty as of mid-2010, according to a government advisory group.
Wong Chack-kie, a professor of social work at the Chinese University of Hong Kong, says a jobs program is needed. “The government is so tangled up by the non-interventionist myth that it’s too afraid to provide much in the way of incentives to encourage development of other industries,” says Wong. The government needs to diversify the economy to “offer different kinds of jobs for unskilled and semi-skilled workers.” The contribution of manufacturing, which could absorb less-educated workers, fell to 2 percent of Hong Kong’s gross domestic product in 2009, from 5 percent in 2000. In contrast, manufacturing in Singapore still makes up 22 percent of GDP.
A plan to dole out HK$6,000 to every permanent resident starting in November, as well as the introduction of a minimum wage, hasn’t boosted Tsang’s popularity. China’s top official on Hong Kong affairs, Wang Guangya, warned the city’s leaders in June that home prices may turn into a “political problem” and urged more care for “ordinary” people.
In May the city government raised its estimate for inflation this year to 5.4 percent, from a previous forecast of 4.5 percent. The rising prices mean Liu Yefen’s three boys spend most of their time inside their cramped flat because outside “everything needs money,” she says. A small electric fan struggles to cool the apartment. “My kids are down in the dumps, maybe because they’re trapped inside this little room for too long,” she says. “I thought life would be better here, but it’s really miserable.”
The bottom line: With more than 1.2 million residents living in poverty, Hong Kong faces rising food, fuel, and rental costs—and a potential political crisis.