MTR's minority shareholders get hit by someone else's gravy train

PUBLISHED : Monday, 12 June, 2006, 12:00am
UPDATED : Monday, 12 June, 2006, 12:00am
 

'...if you believe that the market knows best, ever since the announcement of the proposed terms of the merger, our share price has actually performed quite well, indicating widespread market support.'


Raymond Chien Kuo-fung,


MTR Corp chairman


YOU HAVE TO wonder whether the man has actually bothered to look at his share price since announcing the terms of a government imposed merger with Kowloon-Canton Railway Corp, a deal that is very much to the disadvantage of his minority shareholders.


The shareholders obviously know that it is. The arrow on the chart of the MTR share price points to its close on the first trading day after the deal was announced.


It seems to me that this price has come down since that time. What was that about 'actually performed quite well?'


And, in case Mr Chien wishes to argue that the share price is down because of the general weakness of the market recently, let me point out that it has in fact underperformed the Hang Seng Index by a margin of almost 8 per cent since the announcement. This is a very substantial relative decline for so short a period.


I think, however, that he would do better to examine why the company's shares were so strong before the announcement. Rumours of the deal with accurate descriptions of its terms were current in the market well before those terms were actually announced. That's a no-no.


How did it leak, Mr Chien? Have you enquired who may have profited?


'Fears over rising global interest rates draw money out of Asia and back to the US'


SCMP headline,


June 9


I HAVE A question for you. Let's say you are an investor in the United States who has decided to put money into the Malaysian stock market. You phone up a broker in Malaysia and tell him to buy Telekom Malaysia shares.


'Very well, sir,' says the broker. 'But these shares are quoted in ringgit, not US dollars. You will have to convert your dollars to ringgit first. Don't worry about it. Our bank will do it for you.'


So you agree. You now have a shareholding denominated in ringgit and the bank has your US dollars.


This might pose a problem for the bank if it held those dollars in Malaysia. Everything there is denominated in ringgit and the authorities frown on US dollar transactions within Malaysia's borders. It would leave Malaysia too open to foreign speculators.


But of course the bank does not hold those dollars in Malaysia. It holds them in the US. All it did was transfer ringgit from one account in Malaysia to another account in Malaysia - your account - so that you could buy the stock.


Meanwhile it instructed its branch or affiliate in New York to transfer the equivalent holding of dollars from your account in New York to another account in New York - its account. When you later decided to sell the Telekom Malaysia shares, these transactions were simply reversed.


So here is my question. Where in this process were these dollars first drawn into Asia and then drawn out again?


The simple fact is that the dollars never left the US and the ringgit never left Malaysia. All that happened is that for a period you were a holder of the bank's ringgit and the bank was a holder of your US dollars. The ownership of the money changed hands but the money itself stayed where it was.


It may be counterintuitive but I assure you that this is the way it works. Contrary to what our headline said, fears over global interest rates did not draw money out of Asia and back to the US. It does not happen that way on the balance of payments.


What these fears actually did was persuade many people that stock market investments in Asia may be overpriced relative both to other forms of investment and to investment opportunities elsewhere in the world.


They believe there are now firm indications that US interest rates will continue rising. This, among other things, may lead to a slowdown in the US economy, could drive Asian interest rates up and would depress Asian economies and share prices.


None of this is new reasoning. Investors round the world have been expecting it to happen for some time but were never sure when it would start. More of them now think it has started.


If it has indeed done so, Asian politicians will be quick to blame their usual bogeyman - short-termist foreign investors who pull money out Asia.


Well, no, this is not actually possible. The foreigners may reduce their holding of Telekom Malaysia but the ringgit stays in Malaysia and the US dollars in the US. The only thing that changes is that the foreigner owns the US dollars again instead of the ringgit and the Malaysian bank owns the ringgit again instead of the US dollars.


If the Asian politician then wants a bogeyman to blame for falling share prices, he can as well find one among his own citizens.


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