By Alex Frew McMillan and James Pomfret
HONG KONG (Reuters) - Property interests dominate Hong Kong's economy and hold great sway over the scandal-hit leadership "election" taking place on Sunday, but public resentment over the influence of big business is growing in the world's most expensive housing market.
China regained control of Hong Kong from Britain in 1997, promising the financial hub full democracy as an ultimate goal, but the people still have no direct say in choosing their next leader and have threatened to take to the streets in protest on Sunday whatever the result.
Hong Kong executive Markus Shaw, the grand nephew of media and film mogul Run Run Shaw, branded the territory's economy an oligarchy, dominated by conglomerates, most with their roots in property. They have great influence over the 1,200-member election committee, which will choose a successor to the bow tie-wearing chief executive, Donald Tsang.
"You know they are basically controlling blocks of votes," Shaw told Reuters in his office where he oversees his family's wealth. "That kind of hurdle is very hard to overcome unless you are their chosen candidate."
Shaw's cynicism illustrates the skewed nature of Hong Kong's political landscape in which greater forces -- Beijing's Communist Party leaders and the city's tycoons -- are able to influence policy making for their own ends. The election committee is stacked with Beijing loyalists.
Beijing's desire for control and the tycoons' thirst for favorable land policies drown out public demands for democracy and affordable housing in what is often hailed as one of the freest and most open economies in Asia, if not the world.
"That's the dirty secret about Hong Kong, really," shareholder activist David Webb said.
Hong Kong is perennially rated the world's freest economy, thanks to low taxes and a lack of duties, but he said industries such as real estate were run by cartels.
"The fact that we keep winning the freest economy in the world is only because there aren't measures of the freedom of the domestic economy."
A series of scandals, many of them real-estate related, has stirred public anger about the tight link between property tycoons and Hong Kong's leaders.
One candidate in Sunday's election, Henry Tang, until recently believed to have Beijing's blessing, has been rocked by revelations of a 2,400-sq ft illegal basement below a family mansion, bigger than most people's homes in the densely populated city.
Outgoing leader Tsang has been criticized for accepting advantages from property tycoons, mingling with the ultra-rich on private yachts and jets, and renting a 6,000-sq ft apartment in southern China at favorable rates.
"There's always been this cozy relationship between the tycoon community and politicians," Peter Churchouse, a property investor who runs the family office Portwood Capital, said. "The tycoons have ridden roughshod over the public and public opinion."
Many tycoons sit on the election committee, including Li Ka-shing, Asia's richest man and founder of Cheung Kong (Holdings); Thomas Kwok Ping-kwong, one of the brothers running Sun Hung Kai Properties, Asia's largest developer by market value; and Lee Shau-kee, the leader of Henderson Land.
The three families control swathes of votes among the 1,193 election committee members through interests in n industries like hotels and transport, such as Sun Hung Kai subsidiary Kowloon Motor Bus, independent observers like Webb say. Unlike Markus Shaw, who did not make it onto the election committee, all of the 18 people representing the property industry were uncontested appointees to the committee.
Sun Hung Kai, Cheung Kong and Henderson Land dominate the market for residential real estate. They will provide 54 percent of the 20,398 private housing units expected to be launched in the city in 2012, Barclays Capital estimates.
Land premiums made up 17.4 percent of government revenue in the 2010-2011 financial year, or HK$65.5 billion ($8.4 billion). Stamp duty from property sales made up another 6.5 percent of collections. That means 24 percent of the money the government raised came from property deals.
Current Hong Kong "chief executive" Tsang got into hot water after newspapers got wind of a private jet trip to the Thai resort island of Phuket on a private jet that local media have said is owned by Cheung Chung-kiu, a billionaire dubbed the "Li Ka-shing of Chongqing" and chairman of the developer CC Land.
Tsang also cruised back from Macau aboard a $19 million yacht owned by a company linked to billionaire tycoon Thomas Lau, the South China Morning Post reported. Lau, who will vote on Sunday, is the brother of Joseph Lau, one of Hong Kong's best-known developers who runs Chinese Estates Holdings.
"Until recently, crony capitalism was a conspiracy theory," Shaw said. "Now with what's happened with Donald Tsang and his relationship with these businessmen, the conspiracy theory has been revealed to be true."
Shaw says he will also take to the streets if Tang, the candidate favored by big business and explicitly backed by the likes of Li Ka-shing, is elected. Tang's main opponent, Leung Chun-ying, left the property brokerage firm DTZ to run, and faces a legislative probe over a conflict of interest construction scandal.
'ROOT AND BRANCH CHANGE NEEDED'
"I would march. I think a lot of establishment figures would march," Shaw said. "It will be suicidal to support a candidate that has no support of the public." [ID:nL3E8EL0ZL].
Christine Loh, co-founder of the think tank Civic Exchange, believes Hong Kong's dependence on land sales has created a "political economy of land" the next leader needs to address.
"There's a sense of entitlement to certain things -- that is what gets the man in the street," Loh said. "It isn't just the individuals that come together. The system binds them together. That is the change that is most difficult. You need a root and branch change."
Vested interests in property run extremely deep. With little social security, anybody who owns a home is desperate to see house prices supported. Hong Kong's first post-colonial leader, shipping tycoon Tung Chee-hwa, stepped down mid-office after an estimated half a million people took to the streets in 2003, including those suffering negative equity after a property bubble burst.
The dominance of the leading developers is partly the result of a high capital threshold to bid for the most lucrative land sites. The likes of Churchouse say it costs HK$1 billion (US$128 million) to "get into the game" in major land auctions, excluding all but the biggest developers.
As for Sunday's election, Hong Kong's next leader may not be the person the property tycoons want, unlike Tung Chee-hwa and the incumbent Tsang.
While the public has no vote, critical media coverage of Tang and the threat of mass protests have now seemingly shifted Beijing's allegiance to Leung, whom many developers oppose given his advocacy of more land being allocated for cheap public housing.
"They thought that Henry Tang was their man," said Paul Zimmerman, an architect and advocate for improved urban development. "Now they are finding out