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Published on Thursday, July 13, 2000
 
Give the buyer a chance to beware


Published in the South China Morning Post.  Copyright  2000.  All rights reserved.

PHILIP BOWRING
Caveat emptor, buyer beware, is at all times the most important consideration for investors. The Government is not responsible if the public is dumb enough to throw yet more money into the Li Ka-shing extended-family coffers by paying silly prices for shares in such cyberspace confections as tom.com. The public should also by now have learned to believe absolutely nothing which comes out of the mouths and ''research'' of the salespeople from that sleaziest of glossy occupations, investment banking.

Likewise, the Government was not responsible when those with access to easy money from banks speculated in the property market in 1997, buying one, two, three flats in addition to the one they already owned and occupied.

The sight of Liberal Party members demonstrating for higher property prices and expecting sympathy for failed property speculators was almost comical. However, do not suppose it would have no effect on the Government. After all, Chief Executive Tung Chee-hwa knows what it is like to be a failed speculator in his case ordering dozens of new ships at the wrong time and then having to be bailed out by his friends in Beijing when his family shipping business almost went bankrupt in the mid-1980s.

This was accompanied by some arm twisting by his creditors and the usual Hong Kong shuffling of assets between private and publicly-owned companies. (Family values, it seems, are particularly valued when they can be exercised at the expense of the public.)

Official sympathy for those with negative equity in property is not surprising from a government which seems to truly believe that the strength of the property market is essential for Hong Kong, rather than being a reflection of the health of the economy at large. This nonsensical economics then justifies all kinds of interventions to bail out speculators who include those ranking government officials who bought investment properties on borrowed money and add to the fortunes of the handful of property tycoons. (Interesting, is it not, that the Hong Kong-based businessmen deemed worthy of being received recently by President Jiang Zemin were mostly from the property sector?)

The Government itself should also be showing greater respect for caveat emptor in its own investments. Following the August 1998 massive stock market intervention, it was said that the Government would be an entirely passive investor and not attempt to interfere in the companies in which it had invested by virtue of buying all the Hang Seng Index component stocks. So one might have expected it to abstain on the issue of Cable & Wireless HKT approving the Pacific Century CyberWorks (PCCW) bid. Curiously, however, it voted in favour, even though many public shareholders were very unhappy at having to accept the inflated PCCW paper. One trusts that whoever made this decision will not surface later as an ex-government official supplementing an already generous pension with a job with the Li family.

The public, meanwhile, needs much better protection than it seems to be getting from the institutional investment fraternity, and the auditors. Individual investors must take care of themselves. But who is to protect the vast majority soon to be forced by the Government to save through the Mandatory Provident Fund (MPF)? Companies will have a choice of MPF providers, and of levels of risk for plans, but individuals have little influence on this and almost none at all on specific investments. So one would expect that as a matter of duty to savers, the institutions which will be looking after (for a large fee) the enforced savings of the people would be taking a lead to ensure that managements, particularly of family-controlled companies, did not get away with abusing the rights of public shareholders.

The log of such cases is long and continuous. This past week, for instance, has brought us yet another example, this time from Dickson Poon trying to avoid revealing a deal to pay his private company $130 million for cyber services, of which it had no previously known expertise, and another $110 million for hardware, to be supplied to the public company, Dickson Concepts, prior to the listing on the Growth Enterprise Market of its recently created cyber subsidiary. This was so outrageous that even the stock exchange insisted that Mr Poon make it a notifiable transaction. But meanwhile there has been, as usual, silence from institutional investors who hold, in trust on behalf of pension schemes and such like, shares in the public company.

That is the norm in Hong Kong where abuse of outside shareholders is an almost daily occurrence and one which is occasionally challenged by a particularly irate or selfless private investor, but almost never by the so-called professionals. The notion that managements and directors have a duty of trust to all shareholders is not taken very seriously, even though it is enshrined in criminal as well as civil law.

The fact is that the institutions are part of a ''let's-not-rock-the-boat'' or ''overturn-the-trough'' circle of brokers, fund managers, investment banks, auditors, trustee companies and supervisory authorities. Blowing the whistle on the well-connected Mr X would not do much for other business, would it? Why, there might even be a few nasty questions about how a famous auditing firm came to sign off on yet another set of dubious red-chip accounts. Or you personally might be cut off the list of favoured pre-launch allottees of shares or options in a hot new issue.

There is also a long history in Hong Kong of front-running by brokers, of kick-backs between brokers and investment banks and fund managers. The public gets occasional glimpses of what goes on, but most remains hidden. The losers are usually either small investors or those investing through collective vehicles such as unit trusts. That is in addition to the layers of intermediary fees and commissions.

So who is going to apply the principle of caveat emptor to the billions in MPF funds, at least half of which are likely to be invested in local equities? Forced savings schemes are fine in theory but give little scope to caveat emptor. The Singapore Central Provident Fund, for instance, is very safe and has a low expense ratio but a tiny real yield, pegged to the savings-bank rate. The Malaysian state pension scheme used to be invested in safe government bonds with reasonable yields. But lately it has been used as a cash box for rescuing badly run companies with good political connections.

So what fate then for Hong Kong's forced savers? Caveat, caveat, caveat ...

Philip Bowring (bowring@attglobal.net) is a Hong Kong-based journalist and commentator.

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Published in the South China Morning Post. Copyright 2000. All rights reserved.