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How China’s Communist Party quietly built a real estate empire in Hong Kong

Even in a city full of skyscrapers, this one stands out: a 41-story behemoth whose giant rooftop globe towers over almost everything else in the Sai Wan neighborhood of Hong Kong.

Locals know it as the political command center of China’s Liaison Office — the Communist Party leadership’s main presence in Hong Kong and a primary target of protesters who have accused the institution of operating a “shadow government” in the semi-autonomous territory.

But the building is also the crown jewel of a rapidly expanding real estate empire that’s attracting increased scrutiny from pro-democracy lawmakers. They say that the Liaison Office’s property purchases are too opaque and that Hong Kong Chief Executive Carrie Lam should explain why her administration is granting the office millions of dollars in tax exemptions on real estate transactions that might be used for political ends.

The Liaison Office and its subsidiary companies have received more than HK$206.5 million ($27 million) of stamp-duty exemptions on at least 91 property deals, according to data provided by Hong Kong’s Inland Revenue Department on deals dating to 2012. This includes a record value of exemptions this year for the Liaison Office?—HK$80.4 million on 22 transactions, most of which were approved after pro-democracy protests started in June.

While the sums may not seem particularly large in the context of the world’s priciest property market, they’ve struck a nerve in a city where many residents struggle to afford homes and where hundreds of thousands of people have taken to the streets over the past six months to rail against the Chinese government’s tightening grip. Thousands of protesters surrounded the Liaison Office’s tower in Sai Wan in July, throwing eggs and ink at the Chinese national emblem hanging above the building’s main entrance.

The Liaison Office is “interfering with everything: local elections, every part of the administration, real estate, too,” said Martin Lee, a barrister and founding member of Hong Kong’s opposition Democratic Party.

In a March statement to the state-run China Daily newspaper, the Liaison Office said its real estate transactions comply with the law and all properties owned by the office are used for work and accommodations for its staff. When reached by phone, officials at the Liaison Office told Bloomberg News they couldn’t provide comment. Lam’s office and the Hong Kong and Macau Affairs Office of China’s State Council didn’t reply to requests for comment.

Part political boss, part publisher and part landlord, the Liaison Office has been a presence in Hong Kong for almost two decades. It precursors operated covertly during the late 1930s by posing as a wholesale tea company, and later under the guise of the Xinhua News Agency, according to Christine Loh, author of “Underground Front: The Chinese Communist Party in Hong Kong.”

Since its formal establishment in 2000, the office has played a largely behind-the-scenes role in trying to shape the political landscape in Hong Kong, which China has pledged to give a “high degree of autonomy” under an arrangement known as “one country, two systems.”

In recent years, though, the office has used subsidiary companies to steadily grow an array of businesses that includes media holdings and most of Hong Kong’s bookstores?—provocative moves in a city where the 2015 jailing of booksellers triggered public outrage. The businesses include Sino United Publishing as well as Wen Wei Poi, a Chinese-language newspaper that has spread the narrative that protest leaders are colluding with foreign agents, according to local media reports.

But real estate is the most valuable piece of the Liaison Office’s portfolio. A Bloomberg examination of hundreds of Hong Kong Land Registry documents found that the office owns properties in more than 20 buildings across the city, with an estimated value of more than $1.5 billion. The figure is likely conservative, given that the Liaison Office doesn’t publicise its transactions and there’s no straightforward way to conduct a comprehensive search of its holdings.

The properties?—most of which were acquired after Hong Kong’s 1997 handover from Britain—include office towers and upscale apartments used to house staff. In February, a subsidiary paid HK$248 million for 20 apartments in the Grand Central Complex, a project in the city’s Kwun Tong district. That’s an average price tag equivalent to $1.6 million per apartment.

The Liaison Office purchased its Sai Wan building, called The Westpoint, directly in 2001 and has done the same with several more properties over the years. Others are held by a private company called Newman Investment whose shareholders are members of the Liaison Office’s finance department. Billionaire Henry Cheng’s New World Development, one of Hong Kong’s biggest property companies, was formerly a shareholder of Newman Investment in the 1970s, filings show. (New World said it doesn’t have a relationship with Newman Investment and didn’t sell the company to the Liaison Office.)

The office’s direct transactions would qualify for tax exemptions under Section 41 of Hong Kong?’s stamp-duty ordinance, which applies to “public officers” and was also used by the British government during colonial times. Purchases by Newman are exempted under a separate section, amended in 1999, that grants Hong Kong’s chief executive broad powers to refund stamp duties. An exemption for Newman would allow it to avoid taxes worth 30% of a property’s value, a rate that was doubled for corporate buyers in 2012 to deter real estate speculation.

Source: Business Standard