A crude intervention at the Hong Kong exchange

PUBLISHED : Monday, 17 September, 2007, 12:00am
UPDATED : Monday, 17 September, 2007, 12:00am

The Hong Kong corporate state marches on with ever-increasing power for the top bureaucrats and the private sector players whose livelihoods depend on cosy relations with the government.

The purchase by the Exchange Fund of 5.8 per cent of Hong Kong Exchanges and Clearing was not just a casual event, an opportunistic buy because it made investment sense. The decision to buy back at a higher price shares it had earlier sold quite cheaply falls into the same category as Cyberport and Disneyland - ill-judged, underhand and delivering another blow to Hong Kong's reputation for non-interference in business and markets.

The same sort of private-sector luminaries who greeted the Cyberport and Disneyland giveaways were on hand to praise this latest intervention, the most crudely political we have seen so far.

It was not surprising to find the cheerleading being led by Ronald Arculli, a classic figure in the Hong Kong colonial-derived power structure. By most accounts Mr Arculli is a personable fellow. His track record is as a lawyer with establishment connections going back three generations. But there's nothing much in his record to suggest he knows much about business in a competitive marketplace, let alone about the world outside the entrenched local establishment.

So perhaps it was to be expected that he was, as HKEx chairman, singing the praises of the government acquisition of its shares even before the board discussed the matter.

Since then, Mr Arculli has been in full voice in the South China Morning Post about how a merger of Hong Kong and mainland exchanges would enable this city to challenge New York, London, Tokyo and so forth. Meanwhile, the exchange has singularly failed to attract any new business other than H shares, which may anyway have passed their peak as an asset class. The local trading monopoly has kept trading costs artificially high to protect certain interests, while failing to attract any foreign listings at a time when London has been getting dozens and even Singapore a good number.

There are some good reasons why some people would like Hong Kong to get closer to the Shenzhen and Shanghai exchanges. Kickbacks are rife, transparency is minimal and insider-dealing rampant. If they, or at least Shanghai, continue to improve their act, they will most likely take mainland business away from Hong Kong.

Indeed, it is noteworthy that, instead of trying to bolster Hong Kong's natural competitiveness and international status, the government has been trying to persuade mainland authorities to help the city with special benefits such as trading yuan bonds and enabling mainlanders to buy local stocks.

To Chief Executive Donald Tsang Yam-kuen's government and its appointees, business is apparently more a matter of politically inspired deals and mutual back-scratching than spurring development through open competition. HKEx should be free to swap shares with any exchange if it so wishes, as long as trading and listing remains properly regulated.

It is enough of an anomaly that the government can appoint six out of the 13 members of the HKEx board. In practice, this has meant not the protection of the investing public against monopoly abuses, even if the kind of corrupt practices that thrived in the days of competitive exchanges have gone underground. Instead, the current exchange has protected vested interests. Regulation that should lie with the Securities and Futures Commission has been given to HKEx, placing it (and the government) in a conflict of interest situation.

But few in the business community speak out. Either they are too busy with their own affairs or they are reluctant to say 'nay' to a government that increasingly takes the Lee Kuan Yew corporate state as its model. Next we will have dynastic politics.

Philip Bowring is a Hong Kong-based journalist and commentator