Now in The Cards: Hong Kong Inc.?
Like the Chinese Communist Party, the Hong Kong government increasingly loves slogans such as “big market small government.” But as in George Orwell’s novel 1984, reality is the opposite of the slogan. Increasingly a cash-rich government is moving down the Singapore path of supplanting private capital and initiative with public funds controlled by a coterie of officials. Meanwhile most of the business leadership – in Hong Kong the property developers and assorted oligopolists – are too compromised by their own cozy relations with the government to protest.
This week the government announced that it had quietly spent several billion Hong Kong dollars in public money to buy 5.8 percent of the shares in HK Exchanges and Clearing, the listed company with a monopoly on stock and futures market trading. This was the first time since the government’s mass panic buying of Hang Seng index components to prop up the market during the 1998 financial crisis that it has directly acquired listed stocks. The investment is currently worth about HK$9 billion, though the average purchase price is not known, nor the period over which the stake was acquired. So much for transparency in government.
Although the 1998 intervention might have been justified by the need to protect the broader financial system, the HK Exchanges purchase was clearly motivated by the political ambitions of the chief executive and his cabal of lifetime bureaucrats without regard to the interests either of the company or of the public whose money this is.
The government already has near-control over HK Exchanges, the monopoly created after 1987 financial market chaos, by being able to appoint no less than six of the directors and retaining a major influence on the appointment of its chairman and chief executive. But apparently that wasn’t enough to satisfy the control ambitions of Tsang’s officials.
They justify the investment as needed to help Hong Kong integrate its markets more closely with those of the mainland while ensuring a privileged position for Hong Kong in the interaction between mainland and international capital markets. They suggest that as mainland exchanges are government-owned it would be easier do deals with them if the HK government had a stake in its exchange.
This is such obvious nonsense that it suggests that there are other motives behind the investment. The Hong Kong government has for some time been trying to persuade – with mixed success – the mainland authorities to make regulatory changes from which Hong Kong’s market would benefit – at least in the short term. It has pushed to allow mainland investors to buy Hong Kong stocks. Indeed, that has been agreed in principle by Beijing but the procedures have yet to be finalized. It has tried to influence Beijing not to divert big new share issues from the Hong Kong H market to the Shanghai A market.
Yuan-denominated bond issues have also been allowed in Hong Kong in a very limited way – the first outside the mainland. If it wants to trade political favours with Beijing over market access it does not need any shares in the HK Exchanges.
As for doing deals with the badly-run market casinos in Shenzhen and Shanghai, this could only appeal to officials who are either totally ignorant of the business or have a pecuniary interest in such deals. It can only undermine Hong Kong’s international reputation and its separate identity as a financial centre.
Indeed, there are dangers already that Hong Kong is sacrificing the interests of its long-term market development by playing political footsie with mainland authorities. Hong Kong needs to be competitive, not to survive on favours or doing deals in the name of market and regulatory cooperation driven by Tsang’s need to be seen by Beijing to encourage closer links regardless of Hong Kong’s specific interests. Meanwhile Hong Kong is losing out internationally, failing to attract any foreign companies to list here (other than few mainland-invested Taiwanese one).
A direct stake in HK Exchanges also sets up a conflict of interest situation particularly vis-à-vis the Securities and Futures Commission which is supposed to be the regulator – though many of the powers which in other countries lie with the regulator have been left in the self-interested hands of the exchange itself.
The government’s pushing of its own interests in the teeth of those of the public shareholders is clearly evident already in the case of the Mass Transit Railway Corporation. The government, the majority owner of MTRC, is trying to push through a forced merger with its wholly owned Kowloon-Canton Railway (KCR) on terms which are oppressive to the MTRC. For political reasons the government is offering to limit fare rises, thus compromising the fare autonomy promised to MTRC shareholders at the time it went public. The arrogance of a bureaucracy that treats rules and promises with contempt is in keeping with the mainland practices to which Tsang aspires.
The government even regards itself as exempt from rules which require disclosure of stakes of over 5 percent in listed companies. The purchase of HK Ex may be the most obvious intervention by the government in the marketplace. But the bureaucracy continues to build powers quietly through other channels. The Exchange Fund, which holds both the surpluses of the government and the assets of the Monetary Authority, in 2006 had HK$122 billion of Hong Kong equities, almost as many as in foreign equities.
Since then the portfolio has grown and may now exceed the foreign portion. While no breakdown of these is available, it suggests that the Exchange Fund holds at least 3 percent of most Hang Seng index constituents other than the mainland firms, which are themselves all government controlled. In addition, various quasi-official funds managed by the government hold Hong Kong equities worth tens of billions. And doubtless the mainland government and its entities hold significant stakes in Hong Kong companies other than the H shares and Red Chips.
The extent of the government’s equity power has provided political reenforcement to the collusion between government and big business. Not only were the major developers the primary subscribers to Tsang’s selection campaign funds. More significant is the chorus of praise from supposed business leaders for the HK Exchanges purchase. First off the rank was the Chairman of HK Ex, Ronald Arculli, a lawyer and former cipher for the developers in the Legislative Council who is now an Executive Council member.
Also immediate past chairman of the establishment pillar, the Jockey Club, Arculli is the archetypal cog in the machinery of government-business collusion. According to David Webb, the shareholder activist who managed to get elected to the board, Arculli did not even bother to inform his board before exclaiming his enthusiasm for the government purchase.
Next up was the Chairperson of the HK General Chamber of Commerce, Lily Chiang Lai-lei, a woman from an established business family, who claimed that the purchase was merely to enhance the returns of the Exchange Fund. The Chamber is supposed to represent a broad base of local and foreign business in Hong Kong. But with a chairman like Chiang and a chief executive who was formerly a bureaucrat, not a businessman, and a representative on Legco who wants government handouts for business, it has become little more than a cheerleader for official and vested interests, not the open competitive market to which it pays lip service.