Elite have trouble with the concept of accountability

February 19 2008

Do the members of Hong Kong's elite of inherited wealth understand the meaning of the words accountability and responsibility? David Li Kwok-po has now stepped down from the Executive Council, albeit reluctantly and without being obviously pushed by a chief executive who seemed inclined, not for the first time, to put personal relationships ahead of principles.

Mr Li is a personable individual who has always sought to be friends with everyone, straddling political and other fences with ease, despite a naturally shy disposition. He is not the kind of person to induce anger or resentment in others. But that does not explain why supposedly responsible individuals have rushed to defend the indefensible.

For sure, Mr Li personally never made money out of the leak of news, entrusted to him in confidence as a member of the board, of the impending Rupert Murdoch bid for Dow Jones. But the fact that he was not charged with a criminal offence, but was instead required to pay a civil penalty of US$8.1 million, cannot hide the serious nature of the leak.

According to the US Securities and Exchange Commission, Mr Li received the news in the evening on April 12 last year. Next morning, he flew to Shanghai with his friend Michael Leung Kai-hung. On arriving in Shanghai, Mr Leung contacted his son-in-law who contacted his broker, Merrill Lynch, and began heavy buying of Dow Jones shares, accumulating some 415,000. During this time he was, according to the SEC, in touch with Mr Li on more than one occasion. When the Murdoch bid was announced, the shares jumped to about US$56 from the US$36 average price paid by Mr Leung. He has had to disgorge his profits and pay an equivalent penalty.

It beggars belief that someone who is on the board of at least 10 publicly listed companies does not understand the importance of confidentiality in this kind of situation. He must have realised that a Murdoch bid for Dow Jones would be a matter of global interest, as well as a major market-moving event.

Whether Mr Li wanted to do his friend a favour, or was just talking loosely, is not known. But it is a huge embarrassment for Hong Kong. It will be an even bigger one if cronyism allows the issue to be treated lightly, thereby giving the impression that insider trading and breach of trust are taken lightly in what claims to be a well-regulated financial centre.

Yet fellow senior figures have rushed to Mr Li's defence as though he were a victim not a culprit. Bernard Chan, another inherited-wealth Exco member, and a lawmaker who represents the insurance industry, was quoted as saying: 'I actually find it unfair. Indeed, he has done nothing wrong. He shouldn't shoulder any responsibility.' Laura Cha Shih May-lung, a fellow Exco member and former vice-chairman of the China Securities Regulatory Commission, also regretted Mr Li's decision to quit Exco.

Are these people fit to be on numerous boards, let alone various government advisory panels, if they cannot see anything wrong in directors telling their friends confidential board information? Do they regard insider trading as acceptable just because it is not illegal in Hong Kong?

Whether the bankers re-elect Mr Li, who has represented them in the Legislative Council for two decades, is up to them. The finance sector re-elected Chim Pui-chung although he had done time in jail for forging documents. Almost anything is possible in the dysfunctional world of functional constituencies, where business interests engage in commercial bargains with the government. As for the other companies on whose boards Mr Li sits, most are family controlled and unlikely to put principles before personal relations.

As the son of a policeman, Chief Executive Donald Tsang Yam-kuen surely knows that leaders in society should set standards and not get away with lower ones than an average citizen.

 

HK Budget:Unfair advantage

SCMP March 2008

John Tsang's first budget was a public relations exercise that most benefits those least in need, writes Philip Bowring

The first budget of the new Tsang administration was politically astute but, in reality, stunningly mean. It also displayed those two ever-present characteristics of the bureaucracy - prevarication and surrender to elite interest groups. The mostly effusive media coverage is testimony to its political merits, as journalists were swept up in the public relations spin that everyone in Hong Kong was getting goodies from a generous financial secretary determined to give back this year's surplus to the people.

Much attention was paid to the volume of words in the speech on small schemes to help the underprivileged and to the overall size of the handouts via rates cuts and a power subsidy, and the one-off payment into Mandatory Provident Fund accounts. It was even given the gloss of helping lower-income earners and addressing Hong Kong's ever-growing income divide.

But do the sums and you will find that the catchphrase 'Leaving Wealth with the People' amounts to further increasing the income divide when inflation is hurting the lower-income groups more than others. Of the measures, only the power subsidy and public housing rent concessions significantly address this issue. Most of the rest of the budget 'generosity' goes to those least in need.

The biggest giveaway by far is to salaries- and personal-tax payers. Add together the tax waivers (HK$12.4 billion), wider tax bands (HK$1 billion), increased allowances (HK$1.3 billion) and a lower standard rate (HK$960 million), and the total comes to over HK$15.6 billion. Yet, the roughly half of income earners who are at the median level will receive none of this. By far, most of the concessions will go to the 400,000 or so in the HK$300,000 to HK$600,000 annual income brackets.

Contrast this generosity to the top 20 per cent of earners with the penny pinching towards the old, sick and lower-50-per-cent income groups. The sum total of increased (mostly one-off) payments will be around HK$5.7 billion. These consist of one month extra payments to social security and old-age allowance recipients (HK$2.7 billion), housing rent relief (HK$1 billion) and roughly half the HK$4 billion being given to all households as an electricity subsidy.

The generosity to the upper income earners came on top of rates concessions totalling HK$11 billion, a benefit unevenly spread across households and businesses.

As bad as the figures are, even worse was the attitude displayed by Financial Secretary John Tsang Chun-wah, who implicitly warned that the old-age allowance, and other benefits, would have to be cut back in future. Note this extraordinary paragraph: 'If the existing social security system were to remain unchanged it is expected that expenditure relating to the CSSA ... would increase from the present HK$13.1 billion to HK$31.8 billion in 2033.'

In other words, as the population ages, Mr Tsang wants to cut back on help for the old who built Hong Kong through the harsh times of the 1960s and 1970s - all the old except, of course, for civil servants.

While expressing shock at the possible HK$18 billion additional cost of old-age allowances in 25 years, Mr Tsang was happy to dole out more than that to his favoured few today. These include not just the higher-income earners but, as usual, the construction lobby. Thus, capital spending - mostly on roads - is to rise from HK$30 billion this year to HK$56 billion in the coming year and to HK$62 billion in 2009-10.

A government determined to spend huge amounts on concrete infrastructure, much of it of dubious economic justification, is unwilling to spend on cleaning up a Hong Kong environment that is widely acknowledged to be a deterrent to international business. Just HK$1.6 billion is allocated to encourage the use of cleaner diesel. If the government were serious about investing in our future health, as well as the needs of a sophisticated service economy, it would put excess capital to work on this issue rather than helping its many friends in the construction industry.

A government willing to help all sectors equally would have cut betting tax as well as the wine tax - another sop to higher income earners and an elite that now collects wines instead of watches.

Even Mr Tsang's good ideas have mostly been timidly executed. The one-off payment to MPF schemes is a pittance. It should have been HK$80 billion, not HK$8 billion, if it were to be meaningful and reflect the slogan of returning wealth to the people. The HK$50 billion capital to be injected into health care reform could prove beneficial but, equally, may become an excuse for cutting back health spending.

At every turn, the administration seems determined not to spend money other than on itself (Tamar) and unnecessary infrastructure (the Stonecutters Bridge). Thus, Mr Tsang did not bother to explain why this year's operating budget will be underspent by HK$8 billion, or why it is desirable for public spending to fall as a percentage of gross domestic product even while capital spending is booming. Nor did he care to mention that, in addition to the fiscal surplus this year of an estimated HK$115 billion, the Exchange Fund had a surplus - after paying HK$27 billion to the government - of HK$109 billion. The accumulated Exchange Fund surplus is now HK$617 billion. That money belongs to the community but it is treated by the bureaucrats as a slush fund to be used as they wish - as with the purchase of shares in Hong Kong Exchanges and Clearing - and without public accountability.

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