Hong Kong’s New Market Obsession

At first glance it seems just the kind of free-market, private-sector, internationally-focused innovation that Hong Kong needs if it is to maintain its place in the global league. But scratch the surface of the proposal, unveiled last week, to establish the Hong Kong Mercantile Exchange (HKMerc) to trade fuel oil futures, and familiar features of Hong Kong's government-linked crony network start to appear.

For sure, it would be in principle be beneficial if the virtual monopoly held by HK Exchanges and Clearing (HKEx) in securities and futures trading were broken. HKEx is listed but is controlled by the government, which can appoint the majority of directors and is itself a minority shareholder. HKEx has been very slow to develop new products and listings and prefers to protect the interests of insiders and small local brokers rather than develop its international role.

Given the government’s role in the HKEx, it was surprising to find the Financial Secretary John Tsang in the forefront of those welcoming the proposed establishment of the HKMerc and the fuel oil futures trading proposal. It is believed that HKEx had already looked at this possibility and deemed it not feasible. It is currently aiming to start gold futures trading instead.

However, Tsang's enthusiasm for a project whose details have yet to be spelled out, and which has yet to be given clearance by Securities and Futures Commission, which regulates these markets, appears to have two wellsprings. One is that Tsang, a lifelong civil servant with no experience of markets, seems obsessed with developing new ones. He is concurrently trying to push Hong Kong as an Islamic finance center and as a wine trading hub. Neither has a natural base in Hong Kong. The other, and probably more important factor, is the political connections, including lead proponent and HKM chairman Barry Cheung Chun-yuen.

As well as being, until recently, deputy chairman of Titan Petrochemicals, a listed company which has oil product trading and storage interest in Singapore and the mainland, Cheung has close links to the Hong Kong government. He is the chairman of the Urban Renewal Authority, a controversial government body whose urban redevelopments are usually hugely profitable for property companies but unpopular with residents, heritage groups and town planners. He is also former chairman of the ICAC Corruption Prevention Advisory committee, of the independent police complaints council and other bodies which give an independent gloss to official decisions.

As if in return, Titan has on its board government political supporters Abraham Shek and Maria Tam, both multiple board seat warmers. Shek represents the real estate developers in the Legislative Council who are the beneficiaries of the URA activities.

Cheung says that the idea was Titan's, not the government’s. Yet, claiming some of the credit on behalf of his party, the Democratic Alliance for the Betterment of Hong Kong (DAB). is none other than a leading pro-Beijing politician, legislator and member of the government's executive Council, Tsang Yok-sing. Writing in the South China Morning Post, he said that the DAB had proposed last year that the Hong Kong government seek the support of Bejing “for building Hong Kong into an international oil trading hub” and that John Tsang had promised to study it.

Tsang Yok-sing is better known for his adherence to Communist Party policies dating back to the Cultural Revolution than to his knowledge of financial markets. Yet he indulged SCMP readers in some rhetoric about how Asian buyers were paying more for oil than those in Europe or the US because they did not have a benchmark market in the region.

“China needs an oil futures trading platform of its own to strengthen its bargaining power in the international oil market”. This chauvinist attitude demonstrated not only complete lack of comprehension of the role of futures markets but also of the role of the existing oil product markets in Singapore and Dubai. In fact Dubai is the main crude benchmark for deliveries to Asian markets and Singapore is the world’s third largest refining hub for oil products. Singapore tried to establish a fuel oil futures market but found that interest was insufficient despite its refining volumes.

Titan itself operates as much from Singapore as Hong Kong. Its founder and driving force, Tsoi Tin Chun is actually now a Singapore citizen. Originally from Fujian province, he came to Hong Kong and then moved to Singapore where he set up Titan Oil Pte. His interests now include various petrochemical product terminals on the China coast which, it is being argued, could be delivery points for the fuel oil futures to be traded on the HKMerc.

Tsoi is a serious and successful businessman and just possibly Hong Kong’s fuel oil contract could play a role both complementary to China's domestic fuel oil market and engaging international players. China is the region’s largest user of fuel oil, used for bunkering and in China for refining into other products, and seems to believe that somehow Singapore traders are manipulating prices. But the last thing Hong Kong needs is a supposedly international market being driven by crony businessmen and nationalist politicians rather than the demands of the marketplace.