Hong Kong Pulls Up the Drawbridge

Hong Kong’s reputation as a well-run financial center open to all competition, has suffered two blows in the past few days. Both may echo long after the immediate noise dies away.

The more important but least noticed by most of the media was a July 18 announcement from the Hong Kong Monetary Authority (HKMA) imposing a cap on foreign government entities holding more than 20 percent of the capital of one of the three note-issuing banks in the territory – HSBC, Standard Chartered and Bank of China.

This unusual interference in the territory’s free-market principles was apparently sparked by concerns that an entity such as the Singapore government-controlled Temasek Holdings or the Dubai government’s Dubai International Capital would gain control of a major local bank. Other countries with excessive foreign exchange reserves, including China, are aiming to create similar sovereign entities to buy equity stakes in foreign companies rather than just acquire US Treasury and other debt securities for their reserves.

However, the announcement from HKMA chief executive Joseph Yam seemed driven by gut parochialism rather than any reasonable concern for the integrity of the local banking system. The function of being a note-issuing bank in Hong Kong is largely cosmetic. It is a good advertisement for the three permitted banks but otherwise has zero significance.

There is absolutely no way that note issuance itself could be impacted by foreign ownership nor that it would have any impact on financial stability. Notes account for only about 4 percent of total Hong Kong dollar money supply. Furthermore, notes can only be issued by the three banks when they deposit with the HKMA an equivalent sum in US dollars – the notional backing for base money.

Two of the banks concerned – HSBC and StandardChartered are not even Hong Kong-controlled anyway. Both are based in the UK. As for Bank of China (Hong Kong) it is already controlled by the mainland government, which holds the majority share in its parent, Bank of China, which owns 67 percent of BoC (HK). If anything Yam’s move might be seen as protection for HSBC and StandardChartered, both of which are widely held and therefore vulnerable to outsider bids, from being acquired – even by a mainland Chinese state entity.

Temasek already owns 13 percent of StandardChartered and has been seen as a possible bidder for control. Temasek also owns 15 percent of Bank of China’s HK-listed H-shares but these do not give it any significant voice given Beijing continued dominance of the boards of major mainland banks.

Temasek has a lousy track record as an investor, but to suspect it, or indeed other government investment entities, of devious designs is weird, to say the least. The same applies to Dubai and others. Indeed Hong Kong’s response to a non-threat is a reminder of the fuss a while ago when Dubai Ports was forced by ignorant outrage in the US from acquiring some American ports when it took over the British port and shipping group P&O.

Unthinking reactions were common. “A sensible precaution” intoned the South China Morning Post. Academics ever anxious to keep in step with a government increasingly inclined to want yes-men in professorial positions deemed it was necessary, without explaining why. But financial sector participants were left wondering about the motives. Given that note-issuance is not a crucial issue in banking regulation, could this be the forerunner of efforts to keep other local banks out of foreign hands? Singapore already has a big presence through the Dao Heng group owned by government-controlled DBS. Of locally listed banks, Hang Seng is already an HSBC subsidiary. Apart from the Bank of China-affiliated banks, that just leaves two significant entities with big branch networks, the low-key, privately held Shanghai Commercial Bank and the better-known, listed Bank of East Asia.

The latter is the family-controlled bank headed by the banking sector representative on the Legislative Council, David Li. Li was not heard to comment on the HKMA decision, perhaps because he had other things on his mind.

Which brings us to second issue. While the rest of the business world was focused on the battle for control of Dow Jones, Hong Kong was focused on Li’s problems as a member of the Dow Jones board. Li was at a conference in Malaysia rather than at the Dow Jones board meeting recommending acceptance of the bid by Rupert Murdoch to take over the company. But that did not prevent him being served with a notice that the US Securities & Exchange Commission was considering charging him with breaches of securities laws in relation to leaking of news of the Murdoch bid some months ago. The daughter and son-in-law of a close business associate of Li, one Michael Leung, had, using funds supplied by Leung, heavily bought Dow Jones shares between the time the board was advised of the bid and the news becoming public. Li has denied telling anyone.

Whatever the eventual outcome, it casts a shadow over the ubiquitous Li, who comes from one of Hong Kong’s oldest and most distinguished families. Li has been the banker’s representative on the Legislative Council for many years, received a knighthood from the British, recently received Hong Kong’s highest honor, the Grand Bauhinia Medal, and was chairman of chief executive Donald Tsang’s recent so-called election campaign. He is so rich and so conscious of his public image that few who know him believe he would have deliberately fostered insider trading.

However, given that insider trading is rampant in Hong Kong, is not a crime and is very seldom punished it would not be surprising if any leakage of information, however inadvertent, was used to advantage. In this case the buying was on a scale, and so open, that the perpetrators may well have been unaware that, unlike Hong Kong, the US treats insider dealing seriously.

Li intends to fight the case and meanwhile appears not to be expected to stand aside from any of the multitude of business and official positions that he holds, which include the HKMA’s banking advisory committee. In both the above issues Hong Kong’s elite can be sure to close ranks – regardless of what that does to its wider interests as an international financial center.