The recent government intervention in the Hong Kong stock market will cause far deeper damages than what it did in 1998.
This month, the government said it had bought shares in HKEx, which owns the city's sole stock exchange, and had become the largest shareholder of it. That was the first time the government actively bought any Hong Kong-listed stock since the Asian Financial Crisis in 1998.
That year, the government, in a novel move, bought Hong Kong stocks and successfully defend its financial system. Years on, Hong Kong had left the turmoil behind and restored its reputation of a free market. In retrospect, the government intervention did no harm. How could the recent purchase of a single stock go wrong?
The difference is -- this time, the government chose.
Unlike last time when it bought all blue chips, of which the benchmark Hang Seng Index was composed, the government chose what to buy, when to buy, how many shares to buy. This discretion creates ambiguity. And ambiguity leads the power of coercion.
Now, the government intervention distracted corporate management from its focus on earnings. CEO of listed companies would ask: "What does the government like?" Will my company become the government's next target? Yes, every CEO, who takes his or her responsibility for optimizing shareholders' return seriously, ought to think about this question.
The next question the CEO should ask would be -- what could my company do to win the government's affection? Today, there are many cooperation opportunities between mainland China and Hong Kong. Stock and futures trading is one of them. Other possible arrangements could happen in infrastructure, utilities, transportation and technology. "What is the next big thing (for the government)?"
The corporate management would be busy developing businesses that they think the government would like. These businesses are not necessarily the most profitability or most efficient for the economy.
The distortion effort will multiply when investors join the guessing game. Investors would ask the same question: "What does the government like?" HKEx share price ended more than 20% higher on the day after the government's disclosure of its holding. They will buy stocks in anticipation of the government's action, rather than based on earnings prospects.
What does the government like? Somebody inside the government must have the answer. If not property regulated, that would create room for the government officials to give favoritism. Merely a public comment by government officials can move share prices up and down. That would create conflicts of interest between the public and private sectors.
This discretionary intervention would open the door for possible bailout for financial troubled corporations, especially those big ones with strong relationship with the government. All the government needs to justify a stock purchase is certain cooperation proposal between mainland China and Hong Kong, whether or not it will be realized in the future.
Therefore, the government holds the arbitrary power overshadowing the interest of investors and businesspeople, including incumbent industry players. Relationship with the government becomes more powerful than ever before.
Entrepreneurship will be compromised. Those start-up companies that experiment new products and services will not get financiers' attention they deserve. Being innovative and adventurous, those entrepreneurs cannot be the government's next pick. They cannot fairly compete with the incumbents that have maintained close relationship with the government.
If the government's intention mandates social activities, talents cannot contribute to the advancement of individual's living.
Hong Kong's success depends on entrepreneurship that enables its economy to transform flexibly from a trading harbor to a manufacturing base, to now a financial center. Hong Kong has long had favorable laws for business activities, for example low taxes and free ports. Above all, Hong Kong entrepreneurs are keen hunters for business opportunities. And a free market, without government intervention, is pivotal to allow investors to reward winners, and in turn encourage further newcomers and new ideas.
Should the government invested in a prominent local factory in the 1970's, when everyone believed that Hong Kong couldn't survive without manufacturing industry, Hong Kong could probably not be able to develop the financial industry as it is today.
In the future, will Hong Kong's success depend on some forms of bureaucratic alliance with mainland China? I don't know. But Hong Kong is destined to fail without entrepreneurship. The government's discretionary action is threatening the vitality of entrepreneurship.
Quam Copyright
12 則留言:
read.
Agree with your title, but feel you have gone a little bit too far on the impact -- do entrepreneurs consider only the goverment's taste when making decisions?
What HKSAR does has culturally hurt HK too. The action has sent a message to the public that it values the interest of PRC gov't over the value of free market. The public has also lost interest in anything other than stock market. How unhealthy.
thank you for your comment. have i gone too far? given the survey i did at this blog, about 50% of respondents said they believe the government will buy stocks other than HKEx within a year. Is it overblown?
Whether it would come true or not doesn't matter. But people's perceptions do matter because it will change people's behavior and distort the share price and hence the funding cost of every company, and ultimately the way of our lives.
Free market is more than a symbol or reputation to defend. What i tried to say was the path a market failure would lead to. It is a matter of life and death.
I agree that the Chinese values over-rule the values of free market here. it is the very underlying concept being questioned.
you know that I am not a big fan to democracy and free market. i think those are not absoulute conditions. Beholding the beliefs on democracy and free market, The SARG colluding with CCCP is a very corrupting busniess. but persons like me will think it otherwise.
so as i said, it is a debate on values, ideologoies, politics, but not economics.
羅安尼+量子:
Thank you for your comments.
If you have a brilliant idea, the likes of facebook, you start up a new business. Then, you go for funding. The venture capitalists like your idea but tell you: "you know, the market isn't like what it used to be. Businesses like yours are out of favor and have very low P/E. i start to worry about my exit strategy. What're those with high P/E? Those government-support industry: exchange, infrastructure, gas and energy do have high P/E. Investors like them because the government buys the shares. Why don't you think of doing something different from what you're doing. No facebook. Why don't you think about panda mating service?"
This intervention changes the way people think, make and enjoy. This is not culture, value and ideology only.
T.F.
Well said.
You make me rethink.
Facebook is a good example as i newly encounter.
Facebook indeed is not invented in China. and fairly say, not major innovative busness idea is.
i will rethink, may be come up with a new framework to agrue with you, or buy your idea.
certainly if i do come up with something, i will make a article on my blog for full debate. hope you won't mind.
i don't mind. liangzi. i've learnt a lot from you.
just read that Facebook has attracted Microsoft and Google as potential buyers. it made me think of our dearest Tom.com...
back to the topic. I start to correlate the intervention with the proposals raised by Mr. Tung Chee-hwa. remember his ideas of 'Chinese medicine city', 'xxx city' and so on?
Proposing such 'blueprints' is actually the same as buying stock of a particular company - entrepreneurs are encouraged to shift to the favoured industries, as they may get subsidies or other intangible benefits.
How do you, or how should we compare these 2 actions - direct intervention and 'blueprints'?
there's one point that I'm sure - '.dom' industry hasnt groomed here, no matter how much effort had the gov't paid.
they are similar. in both, bureaucrats have to pick winner. i haven't figured out the difference. Yeah, your analogy makes the point.
well, if 'blueprint' is another intervention 'worse than 1998' (:P), is Donald Tsang justified to name 4 industries as collars of HK economy?
Not only the entrepreneurs will be moved, but also the students who are going to pick their major subject in university (or IVE, whatever). The future of the city and us are then picked.
student take the wrong major, yes. just take a look at hang seng index constituents ten years ago, 20 years ago, and you will see how big it has changed over ten years. What about ten years or 20 years from now? Even 30 years not too long compared with career life, if you take the wrong major, you will be out of job by 48 years old.
naming four collar wrong. misleading people. but just paying lip service of course is less severe than using money to subsidy or intervene.
Why can't the HK gov't be an investor in 388? Refering to those sovereignty funds investment around the world, it seems that the HK gov't is too slow to capture those investment opportunities to creat better profits for HK residents. If they would be smart enough some years ago, the HK gov't should have invested in ports, railways, stock exchange services in SZ and controlled their development to serve needs of HK development and to share growth of SZ and China. It is very much efficient and effective to creat wealth and ecnomic profits for HK people than constructing those unreasonable projects. However, the best chance has gone! Besides, the HK gov't should have to take majority voting right over 388 otherwise those foreign investors will repeat the same as those cases in 823 and 66, doing against the gov't for their own interests and political objectives. David Wedd, who always fools HK people, is one of the obvious fellow in the case.
anonymous: thank you for your comment and thank you for pointing out the sovereignty funds. If this government intervention isn't for profit, as the officials said, it must involve the government's judgment for the "common good" of Hong Kong -- a winner picking exercise, which is similar to what you dislike about "projects". What is the difference between handing out "valuable land" (in the case of "projects") and giving away cash (in the case of buying stocks), if the investment return, private or social, is anything but the narrow prediction by bureaucrats?
Sovereignty funds are far from perfect, either. The government should distribute the money to the public and let you and i choose what to do with it. The fund manager whom you trust would probably not be the same one i trust. If any of those investments for the sovereignty funds are good, private fund managers should have no problem investing in them. Private fund managers could probably do better on spotting the potential. If the return would not be good, but the society will "benefit", someone, that's you and i, will have to pay for it. Then, we fall back to the lines about the "projects".
However, if the government needs to keep some cash reserve for the sake of stability, if it is to invest for profit and if it tries to invest professionally, sovereignty fund investment will be second better, better than sheer intervention. After all, we haven't even yet known about the proposal, if any, following the HKEx purchase.
i need to do some research about what other government funds, such as Temasek, is doing. i suspect that China's government fund would become a mess unless it sticks to the principle of profit-seeking only and forget about showing off, although it is too early to tell.
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