Instead of a Chinese partner emerging for Hongkong Telecom, the Chinese government-controlled Citic Pacific sold its 7.74 per cent stake in the company at a knock-down price to the state-run China Everbright industrial conglomerate.
Volume trading on the Hong Kong stock market was very heavy, driving the blue chip Hang Seng Index to 14,075 points at one stage. The index finally closed 190.5 points up, at an all-time high of 13,930.8.
The intensity of market rumours caused Hongkong Telecom's shares to be suspended for most of yesterday's trading. Dealings resumed just before the close, but were greeted by a flurry of sell orders which wiped 3 per cent of the company's share price to HK$14.50.
However, investors took a more favourable view of Citic Pacific, China's biggest overseas investment company. Despite the low sale price of HK$12.50 a share, a 16 per cent discount on the pre-suspension price, the move was seen as providing Citic Pacific with the funds for investments with better potential. Citic's shares gained 90 cents to HK44.4.
Brian Smith, C&W chairman, issued a brief statement saying that the proposed investment "demonstrates continued confidence in Hongkong Telecom and Hong Kong through the 1997 transition and beyond". The statement described Everbright, which is not listed on the local stock exchange, as "a significant enterprise under the leadership of [China's] State Council".
Hongkong Telecom, controlled by C&W with a 59 per cent stake and capitalised at more than pounds 12.3bn, is one of the colony's largest companies. Its share price has been spiralling upwards in anticipation of a deal with China Unicom, China's second telecommunications network operator, owned by several regional governments, Citic Pacific's parent company and the Ministry of Electronics.
The deal was seen as a powerful piece of political insurance for the colony's former monopoly telephone company, which is vulnerable because of its British ownership.
On Thursday Dick Brown, C&W's new chief executive, made his maiden appearance in the colony for the annual results which fuelled speculation that he was in town to conclude a deal with China Unicom.
Some analysts believe a deal may still be possible or that C&W might be able to persuade China's powerful Ministry of Posts and Telecommunications (MPT) to enter into a strategic alliance. If this does not materialise then analysts believe that Hongkong Telecom's share price will be knocked for six.
The problem is China Unicom does not have the money to take a big stake in Hongkong Telecom, unless it can find financing on very favourable terms.Reuse content