Hong Kong's Markets Need More Sunshine


By Mark L. Clifford Can Hong Kong play in the big leagues of global stock markets? Although it has long been home to Asia's largest and most liquid markets, the city suffered from a reputation as a boys' club where insider trading and market-ramping rumors ruled the roost. Sure, things have come a long way since the 1980s, when members of the listing committee received discounted shares in exchange for giving an IPO the go-ahead. But Hong Kong's claim to be "Asia's World City" -- one with a first-class financial market -- is still little more than hometown hype.

Hong Kong boosters say the territory's laissez-faire attitude toward minority shareholders, corporate governance, and securities fraud will change -- and soon. The territory in March overhauled its securities framework for the first time in more than a decade. The changes make insider trading a criminal offense, so executives face the possibility of going to jail instead of simply paying a fine.

Less important but still noteworthy: The new law lowers to 5% of a company, from 10%, the threshold at which substantial owners must disclose sales or purchases, and reduces the time period in which directors must disclose sales or purchases to three days, from five. Andrew Sheng, chairman of the Securities & Futures Commission, says it should mean "major improvements in the corporate governance framework in Hong Kong."

RIGHTS LEFT OUT. Is this really enough effort for a place that aspires to be Asia's financial center? Critics charge that the law doesn't get at the root of Hong Kong's myriad corporate governance problems. The reason: Minority shareholders still have almost no rights. Listing rules are produced and enforced by the stock exchange, a commercial enterprise with no ability to do anything other than reprimand offenders. It's nearly impossible for minority shareholders even to bring a matter to a shareholders' vote. There's no check against directors and executives taking large sums of money out of companies in the form of fees and bonuses. And that's exactly what they do.

Corporate watchdog David Webb, who runs the eponymous webb-site.com, has just seen the government turn down his proposal to form an independent organization to protect minority shareholders' interests. Although the call to set up the Hong Kong Association of Minority Shareholders (HAMS) was widely endorsed by institutional players, the government declined to even hold a public consultation on the matter.

Hong Kong officials say they're worried about the accountability of a private organization funded with public money. Webb takes a less charitable view. He points to the heavy representation of corporate interests on the Standing Committee on Company Law Reform (SCCLR), a government-appointed body that's studying legal changes to Hong Kong's company law. It effectively nixed the HAMS proposal, he says. "There is a vested plutocracy that wants the status quo to remain," says Webb, echoing a widely held sentiment.

FORM OR SUBSTANCE? Webb notes the irony of a government that's worried about accountability for HAMS, yet has no electoral accountability of its own. Hong Kong's chief executive is effectively appointed by Beijing. In fact, Hong Kong this year had to cancel the election for the post because no one could even be bothered to campaign against the reelection of Beijing's man, Tung Chee-hwa. Only 800 people were eligible to vote, and more than 700 threw their support behind Tung in the first four days after campaigning began (see BW Online, 3/4/02, "A Insider's Take on Hong Kong's Tomorrow").

Half of the 60 seats in the legislature, the Legislative Council, are chosen by small groups of electors. None of these small-circle seats have even 50,000 voters, yet Webb projects that within a year HAMS would have had that many members.

There's no question that Hong Kong's securities laws have gotten better. It's now up to regulators and courts to show it isn't just a matter of form over substance. Many people see insider trading and selective disclosure of sensitive information as no more serious than jaywalking. And the stock exchange hasn't shown much teeth in enforcing rules. Stocks gyrate up and down like yo-yos, but offenders walk free.

This is the year in which regulators claim the legal changes will jell. "Watch this space," promises Sheng. Investors will indeed be watching closely. After lots of talk about change in Hong Kong's markets, now it's time for action. Hong Kong-based Asia Regional Manager Mark L. Clifford has seen two booms and two busts in the decade he has been watching its stock market


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