Hong Kong’s Bureaucrats and the Stock Exchange
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 forward-looking.
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.