Remembrance of Things Past

Twenty years on from Black Monday, when Wall Street and other indices fell to earth with a resounding thud, Hong Kong in particular needs to remember the time when its stock market was closed for four days, its futures market collapsed and the head of its stock exchange ended up in jail.

It particularly needs to do so now that its own markets, increasingly dominated by mainland H shares, have been driven to new records by the bubble in Shanghai.

So what could happen to Hong Kong if Shanghai collapses, or Wall Street falls in one day even half the 22 percent it tumbled on October 19, 1987? By the end of October 1987, once the market had re-opened, the Hang Seng index had fallen by 45 percent.

In theory, everything is much better today. The government controls the reconstituted stock and futures markets through appointments to the board of HK Exchanges, in which it also has a substantial stake. Local banks are fewer in number and supposedly better regulated. Interest rates are low and the banks liquid. The Securities and Futures Commission has been vastly expanded.

But bull markets have a habit of attracting clever rogues who use political and other connections to make off like bandits when the collapse comes, leaving small investors and the government to pick up the bill.

Thus it was in 1987. The person with greatest single overall responsibility for busting the HK Futures Exchange was Robert Ng, the head of Sino Group and son of Ng Teng Fong, the Singapore property tycoon. Ng reneged on a huge number of long futures contracts on the Hang Seng index held by shelf companies and was on the point of being arrested on criminal charges when he made deal with the government. This involved writing-off some HK$500 million in debt to the Futures Exchange.

Altogether the bail-out cost the government around HK$800 million while various big brokers were strong-armed by the government into contributing to the rescue package for the Futures Guarantee Corporation. The owners of the Guarantee Corp included the two largest banks, HSBC and Standard Chartered, but they, like Ng, had claimed limited liability. Ng has not suffered from his record in 1987 and remains a leading property developer, “much respected” by his peers.

The head of the Stock Exchange, Ronald Li, was eventually jailed for corruption involving preferential access to share listings. But the pursuit of Li, jailed in 1990, was more an exercise in revenge for the embarrassment he had caused by closing the exchange and then publicly threatening a journalist (see box) than for the enormity of his crimes. Li presided over a supposedly reformed unified exchange after a debacle in the early 80s forced a government-led unification of the existing four exchanges under the leadership of Li. But instead of competition, Li then ruled a corrupt, government-approved monopoly. Immediately before the crash the exchange was in the process of approving a listing for Club Volvo, the legendary high rollers’ hostess club and prostitution front in which Li held a stake, along with, it was rumored, Beijing.

Malpractice in the exchange management was rife, with the major local investment banks regarding graft and insider activity in listings as almost the norm. The Securities Commission turned a blind eye. None of the counterparties – headed by HSBC subsidiary Wardley – in the graft cases against Li, one of which involved the listing of Cathay Pacific Airways, was ever charged.

Some things in Hong Kong are better now. But the new monopoly still exhibits a lack of regulatory muscle and aversion to competition. It turned a blind eye to numerous scams, mostly through the second board Growth Enterprise Market during the bubble of 1999/2000. Well known names were frequently successful in persuading the GEM to waive its own rules in their favor. Result: more riches for tycoon families and more losses for small investors who bought into ramped stocks.

As it is, mutual back-scratching is alive and well in Hong Kong and some H share companies in particular have engaged in practices that should merit the attention of regulators or even criminal investigators but which are viewed as off-limits for political reasons. Likewise, as happened at the time of the Asian crisis, mainland banks are widely viewed as having not been averse to writing off loans made to finance speculative purchases by well-placed individuals on the boards of mainland owned companies.

For Hong Kong, perhaps an even bigger financial event was the series of scandals in the early 80s which cost huge sums for taxpayers. Most notable was the Carrian group which linked Hong Kong to Malaysian politics and saw murders, apparent suicides and massive corruption in the banking system. Some Malaysians went to jail for long periods but most of the Hong Kong players, Chinese and expatriate alike, escaped one way or another.

So it was too with the collapses of banks and deposit-taking companies which followed the 1983-4 property and stock retreats in Hong Kong and Southeast Asia. Some banks owned by well-known local families were rescued either by the government or larger local institutions but largely escaped largely escaped the law though fraud as well as breach of banking laws was involved. It later transpired that one of the government’s leading prosecutors was on the take.

One cannot tell when or how the latest bubble will burst. But it seems certain that small investors will be on the losing end, and the vast majority of frauds and corrupt dealings by the rich and powerful will go unpunished. As on the mainland, a few cases will be prosecuted to try to convince the public that the government is serious about corruption crack-downs. But in 2007 as in 1987 and on other occasions, money and political influence will trump the spirit and letter of the law.

Following the closures of the Hong Kong stock and futures exchanges, their boss Ronald Li held a press conference. It was attended by some 50 local and foreign journalists, among them the correspondent for the Sydney Morning Herald, Eric Ellis. (Now Fortune Magazine’s Southeast Asia correspondent and occasional AS contributor). Li gave non-answers to questions posed by Ellis. When the reporter persisted with questions about authority to close the exchange and his own position in the markets Li lost his temper. He raged at the reporter alleging slander, yelled that he should be jailed and ordered his henchmen to bundle Ellis out of the hall –which they did.

All this was before the television cameras and news agencies of the word. Li’s arrogance and intemperance on being questioned about the reasons for closing the exchange contributed to his downfall and subsequent jailing. But Li was not arrested until early 1988. It was carried out with maximum publicity as if to show that blame for events could be placed entirely on him. By then Ellis had been subjected to constant abuse and threats. The lug nuts of his car were loosened, notes with threats were mailed and pushed under the door of his house and he was warned by the police and the Independent Commission Against Corruption to be on the look out for “reprisals”.

Typically the leading Communist Party newspaper, Wen Wei Pao, fanned the xenophobic flames. Ellis, it wrote, was a “barbarian foreign devil who brought Hong Kong into disrepute by impugning the international honor of one of our most esteemed businessmen.”