Hong Kong’s Babes in the Woods
It’s hard not to feel a strange mixture of giddiness and sympathy in relation to Hong Kong's connection to the newest Wall Street trading scandal. The Hong Kong couple accused of making millions off inside knowledge of Rupert Murdoch’s US$60-a-share takeover bid for Dow Jones Corp, seem, in some ways, just plain lucky.
The giddiness is like: wow. We are well aware that our own local market is a prodigious fount of secrets, leaked deals and blue-flame stir-frying. But who knew some people had a channel on the big deals about to blow in New York?
Prominent Hong Kong banker David Li is a frequent, frequent flyer to New York. But we assumed he was just shopping and dining. Of course Mr. Li didn’t trade in Dow Jones shares ahead of the announcement of Murdoch's takeover bid. While he concedes he knew about the deal, he says he didn't speak a word to anyone, not even his wife. Nor to his friend Michael Leung, whose daughter, Charlotte Wong Ka-on, and son-in-law Wong Kon-king, are under investigation by the U.S. Securities and Exchange Commission for suspected insider trading.
We hope the Wongs are innocent. We hope the US$8.2 million they made by buying shares in Dow Jones ahead of the takeover announcement was a well-earned display of investment genius, or, alternatively, a bit of free luck dropping from the skies because the gods are nice guys.
But if the Wongs are found guilty, it will be hard not to feel a little sympathy. They're from Hong Kong. How could they have guessed that insider trading is wrong when in Hong Kong, the world's sixth-biggest stock market, which also overtook New York last year as the world’s second biggest for IPO market, seemingly anybody doing an arms-length trade is woefully uninformed or naïve?
On every working day in this glittering capital, stocks rise and fall on rumors. Many of these rumors turn out to be wrong. People get burned all the time. But just like the British tabloids, they also manage to get a lot of stories right. Hong Kong is a deal-town. Companies are constantly chasing the next big thing and stock traders are eagerly in on the chase.
Just jump on the Hong Kong Stock Exchange website for May 10, for instance. You could pick any day, but May 10 will do. You will find a full 13 "Unusual Price Movement" announcements. These are posted when shares suddenly go through the roof. They are required by regulators to say whether or not a deal is in the offing, and sometimes these notices force a company to divulge dealings which they hoped to keep private. Today, for example, a travel company called Wing On had to announce it is planning to buy a luxury train operation. This was clearly not new news to everyone – it had to make the announcement because its shares spiked the day before.
Most of the time these announcements just say: "We know of no reason for the unusual volume.”
But if the stock exchange knows of no reason, lots of other people probably do.
Let's take one small randomly-chosen example: the small board GEM-listed IT company Proactive Technology. Despite the fact that the firm has never been blessed with profit, its dormant shares began tilting northward late last year. Sure enough, in early December the company announced a change of business. They offer very few details about this new business – just something vague about a memorandum of understanding with China Railway Television Media to run a logistics business together.
The shares jump a bit, but their travel from a year's low of HK$0.4 to a higher of HK$15.8 takes quite a few months. It reaches its peak just before April – when the deal is finally confirmed.
China Energy is another hot stock with an interesting history. This company used to be known as the Hon Po Lobster Group. Then it got some new directors, switched its focus to energy, and its shares have gone through the roof. Explicitly, speculators are interested in a joint venture agreement with the Chinese oil company Sinopec – a duly announced deal – to supply natural gas to Macau from a terminal they are building in Zhuhai.
This is all public information. But in the disclosure documents posted by the company to the Hong Kong Stock Exchange, you will not find one word about another of China Energy’s grand plans: that they also hope to use the same infrastructure to sell natural gas to the much bigger city of Hong Kong. If you read the tender document submitted successfully to the Macanese authorities, you will see this plan. We also know this plan has been talked about on the stir-fry circuit. We also know that ABN Amro managed to place shares in this company to institutional investors last month, after its share price had already hit wonder heights. Hmmm.
Ah, but things are done differently on Wall Street these days. It's much, much less fun. And if I were a Hong Kong investor, I'd stay away from that market, no matter what good tips you might get.