Hong Kong’s Bureaucrats and the Stock Exchange

As other markets open
to the private sector, Hong Kong’s government seeks to take
control of its exchange

Related story: 
Hong Kong's Power Elite and a Company's Collapse: Ocean Grand

In other parts of Asia
governments are moving away from control of stock markets and
encouraging the private sector to assume responsibility, but not so
in Hong Kong, where free enterprise is supposed to be the order of
the day.

For reasons still
unexplained, the Hong Kong government, via its massive currency
reserve fund, decided to take a 4.4 percent stake in Hong Kong
Exchanges and Clearing company and last year upped its holding to 5.9
per cent, making it the exchange’s largest single shareholder.
Now it has used its holdings to ensure the election of
government-friendly members to the board.

The results of an
election for two non-executive directors were announced on 24 April
and showed that the government had used its 63 million votes to
secure the election of Vincent Lee and the defeat of Bob Bunker, who
is associated with David Webb, a prominent local corporate governance
campaigner. When Webb stood in a previous election he scored the
highest number of votes from shareholders as the government decided
to abstain from exercising its right to vote. Elected with Webb was
Christine Loh, an independently-minded former legislator who joined
his ticket.

The government’s
decision to abstain from voting on that occasion was understandable
because not only does it appoint the Exchange’s Chief
Executive, it also appoints its chairman and six members out of the
thirteen member board. Taking no chances on an independently-minded
chairman, it opted for Ronald Arculli, who also serves as a member of
Hong Kong’s Executive Council, the de facto cabinet. Now the
government has ensured that a majority of board members are beholden
to officials.

What makes the
government’s desire for control of the stock exchange even more
questionable is that in its enthusiasm to ensure that Bunker was not
elected it threw its weight behind Vincent Lee, the managing director
of the Tung Tai Group, which runs local broking firms. Lee, however,
is arguably better known for his role as a director of the failed
Ocean Grand Holdings, which collapsed in 2006. The company’s
ex-chairman, Michael Yip, has since been charged with a number of
criminal offenses related to the company’s collapse.

Lee says he knew
nothing about what was really going on at Ocean Grand -- although he
was chairman of its audit committee for over two years before it
suddenly stopped trading. He nimbly resigned ‘for personal
reasons’ just three days before the company was put into
provisional liquidation. It appears that Lee’s record of
stewardship as an independent director of Ocean Grand did nothing to
dissuade the government from the view that he was the candidate who
could best ‘help develop the market’.

All of this however
begs the question of why the government should be holding such a
large stake in the local bourse and why it is determined to control
its management. Rumors abound as to why the administration is so
anxious about the stock exchange and they are not assuaged by the
reluctance of the authorities to discuss this matter. David Webb
believes that the government is anxious to placate the small local
brokerage companies that exercise a disproportionate amount of
political power in Hong Kong’s bizarre political system, which
provides a privileged elite with seats on the Election Committee that
selects the Chief Executive or head of government.

Other rumors suggest
that the government is keen on cementing some kind of shotgun
marriage between the local bourse and one or both of the mainland
Chinese exchanges. Why this should be to Hong Kong’s advantage
is not clear. However, the government chants the mantra of economic
integration with the mainland far too often for it to be ignored.

The Hong Kong
government says it is keen to foster the development of the local
financial markets but will not elaborate on whether this requires its
direct guiding hand or whether it believes that market forces alone
will be sufficient to drive progress.

Unfortunately Hong
Kong’s stock exchanges have a long and troubled history which
culminated in a major purge in 1987 when a host of exchange
officials, including its notorious chairman Ronald Li, were arrested
on corruption charges.

The government had
little choice but to step in and help install a new, cleaner
management. But matters were not helped when in 1995 Chim Pui-chung,
the stockbrokers’ representative in the legislature, was found
guilty of fraud and forgery, sent to jail and then was promptly
re-elected on his release by the small constituency of local
stockbrokers who are allowed to vote in this election.

Mr Chim’s
supporters are heavily courted by the government and have been
responsible for much of the xenophobic talk coming out of the stock
exchange where local brokers feel threatened by the muscle of the big
international houses which now dominate trading. People like Webb and
Bunker have been criticized for simply being foreigners, an
accusation that sits uncomfortably with Hong Kong’s claim to be
an international financial center.

The old guard at the
exchange is fighting a rearguard action to preserve the interests of
the small brokers and has been amazingly successful in blocking
reforms, such as the narrowing of trading spreads that threaten their
profits. What is slightly disturbing is the support they are
receiving from the government which declares itself to be

Having tightened its
control over the exchange’s management the administration needs
to decide whether it will support a more internationally oriented
stock exchange or maintain it as a largely domestic market with a
strong bias towards newly privatized Chinese state corporations.

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