Look beyond China plays and reit offerings

SCMP May 29 2006

Last week's big correction notwithstanding, Hong Kong's financialservices sector has been enjoying quite a boom over the past 18 months. This isn't so much measured by the Hang Seng Index as by the size of new issues, which bring mega bucks to investment bankers and hefty fees to the hangers-on - lawyers, accountants and advertisers.

But instead of crowing about this great leap forward in market capitalisation and, to a lesser degree, turnover, the authorities would do well to contemplate what the nature of the new issue boom says about the insularity of Hong Kong.

Instead of looking more like a global, or even Asian, centre, Hong Kong is often reminiscent of the club set-up before the Big Bang of the 1980s propelled London from dinosaur to dynamo.

Apart from the general liquidity excesses that have been driving markets everywhere, the boom in Hong Kong issues has been driven by two factors - China shares and the surge in real estate investment trust offerings.

The China boom owes little to the Hong Kong market's excellence, but much to the inadequacy of mainland markets and the problems of listing in New York as a result of Sarbanes-Oxley disclosure rules.

The "one-country" principle also helps Hong Kong. That is natural, but it also seems to persuade institutions to give views on mainland companies, especially banks, that test credulity. It is no crime to be carried away by the general enthusiasm for the mainland, but sometimes one is reminded of financial institutions' sales pitches during the dotcom boom.

Note the extraordinary recent denial by Ernst & Young of their own report suggesting bad loans in China were likely to be more than twice the official figure. It is hard not to believe it withdrew the report to protect its China audit business. There have been enough warnings over the realities of Enron and Arthur Andersen to alert big accounting firms about conflicts of interest.

Stocking the market with probably overpriced China plays, while foreign listings are conspicuous by their absence, will retard Hong Kong as a global centre. While institutions here have been making easy money with huge China deals, Singapore has shown an ability to punch above its weight by snaring the US$1 billion listing of Thailand's leading drinks company, Thai Beverage, kept off the Bangkok bourse by religious pressure.

It is perhaps typical of Hong Kong's current China-centricity that this snub to Hong Kong went unnoticed among a business elite with plenty of connections in China and the west, but often ignorant of the Asian region.

This lack of interest in Asian neighbours other than China is stunning. Apart from Japan, South Korea has by far the largest domestic bond market in the region and one that is open to foreign investment. But is HSBC Private Bank, the private banking arm of Hong Kong's biggest institution, able to deal in it for its clients? No.

As for reits, they underline the small circle of business here. In most countries, reits are launched and managed by independent entities. Like other fund managers, they provide small investors with access to diversified portfolios, and perhaps some tax advantages. But who are the reit merchants in Hong Kong? The property giants who are using them to raise cash. Cheung Kong and Great Eagle have already launched, Henderson, SHK Properties and others have them in the works.

There is an inherent conflict of interest here between vendor and investor, which no amount of diligence on the part of trustees can overcome.

If there were a genuine investor thirst for reits, why did fund managers not create them? The truth is that in Hong Kong, they offer no tax advantages and there are already numerous ways of investing in property. Reits are the rage because developers have a new way of raising cash by selling less-desirable bits of their own portfolios. Caveat emptor.





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