Leaked US report suggests how minibond saga changed Hong Kong Hong Kong's minibond saga was only settled after acrimonious discussions between the banks and the Securities and Futures Commission (SFC) and has changed the city's banking regulatory environment, according to a report that has shown up in WikiLeaks, written by Chris Marut in 2009 when he was acting US consul here. Marut wrote that that the SFC forced banks to come to the table by threatening to revoke their licence to sell securities. The key to getting a solution, Marut says, was in getting Bank of China (Hong Kong), which had sold almost half of the minibonds on which Hong Kong investors lost billions of dollars, to agree to compensate investors, after which other banks caved in. But this required permission from Beijing and was only secured following discussion between Hong Kong's Financial Services and Treasury Bureau (FSTB) and its mainland counterparts. The agreement resolved a contentious political problem for the Hong Kong government. Marut said its public demand for banks to repay investors meant that its credibility hinged on investors getting repaid, rather than on its support for legal process. But the heavy-handed approach to securing agreement harmed the city's long-term competitiveness. FSTB undersecretary Julia Leung Fung-yee is quoted as saying that the SFC led the negotiations but had to be reigned in by the bureau as it was too demanding in seeking 100 per cent compensation and fines. This was making getting bank agreement difficult. Mark Steward, SFC executive director (enforcement), is quoted as saying: 'the banks were in denial' but were eventually forced to understand that they would have to deal with the SFC. 'This is a watershed for the banking industry in Hong Kong,' Steward said. The banks were not happy with the settlement or the process, according to Nelson Man, executive director for banking supervision at the Hong Kong Monetary Authority. He said the banks distrusted the SFC and wanted to keep the HKMA as their primary regulator. Marut goes on to say that the settlement not only resolved the Hong Kong government's political problem but changed the relationship between the banks and the city's regulators. Previously, banks met regularly with HKMA regulators, but since the settlement the banks have had to deal with both the SFC and the HKMA. Man said the settlement scheme increased investor moral hazard in Hong Kong and that dissatisfied investors disappointed with other structured products would be more inclined to take their complaints to the streets, rather than the courts. Empty boasting fools no one InvestHK, the body charged with encouraging companies to set up in Hong Kong, takes issue in today's letters page with our comments about the organisation's attitude towards foreign investment. InvestHK held a press conference at the end of July to announce the UN Conference on Trade and Development's 'world investment report', which showed that the city attracted US$69.8 billion of foreign direct investment last year. We commented at the time that it was 'absurd' for InvestHK to give the impression that this much money remained in Hong Kong, since there was no way it could absorb such colossal investment. We said it was obviously coming out of the mainland and returning via the city: round-tripping. In her letter, Karen Winton, chief marketing officer for InvestHK, writes: 'As is the case with other economies, it has long been acknowledged that there is a round-tripping component to these fund flows.' With respect, this was not acknowledged at the press conference. Indeed, the opposite impression was given. Wong Tak-jun, dean of the faculty of business administration at Chinese University, who co-hosted the conference, said: 'The way we calculate these funds is that they really have to be invested here.' Asked if they originated on the mainland, then went back out of the city, the professor said: 'The money stays in Hong Kong. So there is no need to worry that the money will come in and go away right away.' It is instructive to look at the latest foreign direct investment figures for Hong Kong as prepared by the Census and Statistics Department, which show that for 2009, 36.4 per cent of FDI came from the mainland while 32.4 per cent came from the British Virgin Islands. Our beef is it is absurd for InvestHK to boast about Hong Kong being the world's third-highest recipient of FDI when most of the funds don't remain here. The city performs a kind of money laundering service. There are few, if any, other places in this position.