Here's what to expect from Hong Kong's new administration

Watch out for a new fiscal philosophy for public expenditure.

Mrs. Carrie Lam won 66% of the 1194 votes in Sunday's CE election casted by the Election Committee. After appointment by the State Council, she will serve as CE starting 1st July, 2017 – which is also the 20th anniversary of HKSAR establishment. 

Citi expects policy continuity and a smooth transition given her former No. 2 role in the current government administration as Chief Secretary of Administration before she resigned three months ago to run for election.

The CE-Elect highlights economic challenges, opinion differences and society conflicts as key hurdles for a better Hong Kong in her election manifesto “WeConnect”, where she intends to “Care”, “Listen” and “Act” upon the long list of issues that HK faces.

Here's more from Citi:

The need to assemble a capable, proactive and popular team
With the CE Election behind us, focus will now turn to the key appointments for the Government Secretariat, which include the Chief Secretary for Administration, the Financial Secretary, the Secretary of Justice, and Secretaries of the 12 policy bureaux.

Especially, the market has high hopes for the new administration to speed up the development of financial services as well as economic cooperation with China by bringing on talents with experiences of public service and the market as the next Financial Secretary, Secretary for Financial Services and the Treasury, and Secretary for Commerce and Economic Development.

Although Mrs. Lam has mentioned the possible creation of a Cultural Bureau, a Tourism Bureau and the splitting of the Transport and Housing Bureau, these considerations will only be examined after the new Administration takes office. We expect Mrs. Lam to build a fresh new team with fairly little overlap with the existing key ministers, and thus reset popularity polls.

New fiscal philosophy for public expenditure
HK has large need of public expenditure, in particular for enhancing the social safety net in an aging society, and to maintain HK's competitiveness. Therefore, the next CE and Financial Secretary will need to maintain an expansionary fiscal stance, preferably in the format of recurrent expenditure rather than the previously preferred one-off relief measures.

It is expected that Mrs. Lam would continue her efforts in poverty reduction, given that she used to be in charge of the Commission on Poverty. Mrs. Lam advocates investing for the future, especially investments in people and land. To kick start, she vowed an HK$5bn per year increase in education resources, and to accelerate the 10-year HK$200bn Public Hospital Development Plan.

The CE-elect also proposed a new two-tier profit tax to reduce tax burden from 16.5% to 10% for companies with an annual profit of less than $2mn thus benefiting SMEs and start-ups; and to introduce Super Tax Deductions that are higher than the amount invested to encourage corporate expenditure in R&D. Mrs. Lam also suggested concessionary adjustments in land premiums as an option to foster social developments.

Land and housing still the policy priority for the next Administration – Home prices continue to break records, as sentiments are raised by high profile Chinese property developers bidding for land in HK. As election dust settles, the government appears to have little choice but to further step up on macro-prudential rules on the housing market in the continual attempt to lean against rapid acceleration of home prices.

We believe such moves need not wait till the start of the next CE term, as the Chief Executive-elect likely will also support these moves to buy time to (1) explore her proposed pilot scheme to allow renting out rooms of HOS units with no land premium paid, and (2) to increase land supply by reviewing the various contentious options of clearing brownfield sites (i.e., rural areas that have business operations), land reclamation, accessing the outskirts of country parks.

On the same topic, we would also like to point out that the latest ban to use UnionPay cards issued in Mainland China for cross-border acquisition of property confirms our view that the Chinese government may look into high profile land acquisitions in HK as part of its effort to stem capital outflows and stabilize the RMB.

The "three mountains to tackle" are now on her plate. Last year, Mrs. Lam publicly pinpointed three controversial issues that the government needs to conquer: (1) Mrs. Lam in her election manifesto proposed to build and upgrade government-operated markets to address the issues related to the Link REIT management of public housing malls. She also suggested to (2) use the government's share of MTR dividend to subsidize long distant grassroots commuters on MTR. In her term, she will need (3) to implement the progressive plan to abolish the "offsetting" of severance payments/long service payments with MPF contributions.

Establishing better communication and coordination channels to build consensus and to act. Recognizing the growing problem of social and political opinions division in HK, the Chief Executive Elect has pledged to increase communication channels with the Legislative Council, District Council, revamp the Central Policy Unit – in order to improve government efficiency for policy enactment and funding approval, to facilitate cross-departmental coordination and foster public participation (including engaging opinions of the young people) in policy formulation. Given the lengthy and challenging to-do tasks, we think the top most controversial item – political reforms – likely will again be left to the latter part of the administrative term.