Why Peking is biggest investor in Hong Kong

THE HONG Kong government which prides itself on keeping its nose out of business is now almost certainly the biggest single institutional investor in the local stock market. And the authority, having spent more than HK$100bn (pounds 7.6bn) of its fiscal reserves on shares, says its buying spree is not yet over.

The precise level of its stake in Hong Kong companies is not known because local stock exchange rules require disclosure only of holdings which exceed 10 per cent of the issued equity. In London the stock exchange requires disclosure of any holding above 3 per cent.

For this reason it is known that the government owns almost 9 per cent of London listed HSBC Holdings, making it by far the largest single shareholder. Prudential Corp had been the biggest shareholder with 4 per cent of the equity.

The government may now own more than 3 per cent of all the shares in all the blue chips on the Hang Seng Index (HSI), giving it a big stake in companies controlled by tycoons such as Li Ka-shing, Lee Shau-kee and Cheng Yu-tung. They are all associates of Tung Chee-hwa, the former shipping tycoon who now heads the government, inevitably giving rise to charges of cronyism. But the government is also buying stakes in companies such as Hongkong Telecom, controlled by Cable and Wireless plc, and some Chinese government-controlled entities such as Citic Pacific.

The government strategy, executed through four medium- sized broking houses, seems to be to buy the market in line with the weightings of the HSI, thus having a direct influence on the index and the high volume of activity in the local futures market which is dominated by the Hang Seng Index contract.

The reason given for this unprecedented and totally unexpected flurry of activity in the financial markets is that the government wants to thwart a "double play" by speculators who are betting on the devaluation of the Hong Kong dollar, which would involve a break of its fixed link to the US dollar. This reasoning says that downward pressure on the equity markets feeds through onto the currency market.

The government claims that since last October the Hong Kong dollar has been subject to four rounds of frontal assault by speculators who have also taken massive short positions in local shares to create an atmosphere of weakness. Under Hong Kong's currency board system, which is used to maintain the US dollar peg, the government is supposed to keep the currency stable by withdrawing liquidity from the foreign exchange market, thus making it difficult for speculators to take positions in the Hong Kong dollar without incurring heavy costs in terms of high overnight interest rates and considerable risks if they take short positions in the currency and its value fails to fall.

Now the government seems to be saying that the currency board system, which it once described as pretty infallible, is not working. If it was working why would it have gone into the equity markets "to restore order", as the financial secretary Sir Donald Tsang, put it.

The effect of "restoring order" has been to provide a wonderful opportunity for holders of Hong Kong equity to get out of a market they see as inherently weak. Were it not for a government ready to buy all the blue chips offered for sale, big institutional investors would probably have kept their holdings because they were reluctant to record heavy losses. Now many investors can get out, without taking a bath. One major local trader said he had never seen anything like it.

"My screen's full of all these sell orders and, on the other side is nothing except this one buyer, and that buyer is buying everything," he said. "I've got people ringing me up asking whether these suckers would be in the market for every two- bit stock you've ever heard of".

The government does not see things this way. Sir Donald says that it "intends to hold these stocks for a while and they should be a very good long-term investment". He added: "We have switched part of our foreign reserves into blue chips which have been bought at very good prices."

Peking has supported this interventionist policy through the Bank of China (its securities department also got a large share of the buying action), although the stakes in the companies will not come under direct Chinese control. Yet the government has managed to hold the US dollar peg, and the Hong Kong stock market is performing better than others in the region. But overwhelmingly the market believes Sir Donald and his colleagues have scored a colossal home goal. Everyone is waiting for the fat lady to come on and sing.

Outlook, page 17

News
The Edge and his wife, Morleigh Steinberg, at the Academy Awards in 2014
peopleGuitarist faces protests over plan to build mansions in Malibu
Sport
Cristiano Ronaldo in action for Real Madrid
football
Voices
Nigel Farage has backed DJ Mike Read's new Ukip song
voicesNigel Farage: Where is the Left’s outrage over the sexual abuse of girls in the North of England?
Life and Style
The Zinger Double Down King, which is a bun-less burger released in Korea
food + drinkKFC unveils breadless meat beast
PROMOTED VIDEO
News
ebooksAn unforgettable anthology of contemporary reportage
Latest stories from i100
Have you tried new the Independent Digital Edition apps?
Independent Dating
and  

By clicking 'Search' you
are agreeing to our
Terms of Use.

iJobs Job Widget
iJobs Money & Business

SQL Developer with T-SQL, Watford, Hertfordshire - £350 - £360

£350 - £360 per day: Ashdown Group: SQL Developer with T-SQL, Watford, Hertfor...

Chief Financial Officer

120-150k: Accountancy Action: We are looking for an experienced CFO from a min...

IT Systems Business Analyst - Watford - £28k + bonus + benefits

£24000 - £28000 per annum + bonus & benefits: Ashdown Group: IT Business Syste...

Trainee Recruitment Consultant - Birmingham - Real Staffing

£18000 - £23000 per annum + Commission: SThree: The SThree group is a world le...

Day In a Page

How could three tourists have been battered within an inch of their lives by a burglar in a plush London hotel?

A crime that reveals London's dark heart

How could three tourists have been battered within an inch of their lives by a burglar in a plush London hotel?
Meet 'Porridge' and 'Vampire': Chinese state TV is offering advice for citizens picking a Western moniker

Lost in translation: Western monikers

Chinese state TV is offering advice for citizens picking a Western moniker. Simon Usborne, who met a 'Porridge' and a 'Vampire' while in China, can see the problem
Handy hacks that make life easier: New book reveals how to rid your inbox of spam, protect your passwords and amplify your iPhone

Handy hacks that make life easier

New book reveals how to rid your email inbox of spam, protect your passwords and amplify your iPhone with a loo-roll
KidZania lets children try their hands at being a firefighter, doctor or factory worker for the day

KidZania: It's a small world

The new 'educational entertainment experience' in London's Shepherd's Bush will allow children to try out the jobs that are usually undertaken by adults, including firefighter, doctor or factory worker
Renée Zellweger's real crime has been to age in an industry that prizes women's youth over humanity

'Renée Zellweger's real crime was to age'

The actress's altered appearance raised eyebrows at Elle's Women in Hollywood awards on Monday
From Cinderella to The Jungle Book, Disney plans live-action remakes of animated classics

Disney plans live-action remakes of animated classics

From Cinderella to The Jungle Book, Patrick Grafton-Green wonders if they can ever recapture the old magic
Thousands of teenagers to visit battlefields of the First World War in new Government scheme

Pupils to visit First World War battlefields

A new Government scheme aims to bring the the horrors of the conflict to life over the next five years
The 10 best smartphone accessories

Make the most of your mobile: 10 best smartphone accessories

Try these add-ons for everything from secret charging to making sure you never lose your keys again
Mario Balotelli substituted at half-time against Real Madrid: Was this shirt swapping the real reason?

Liverpool v Real Madrid

Mario Balotelli substituted at half-time. Was shirt swapping the real reason?
West Indies tour of India: Hurricane set to sweep Windies into the shadows

Hurricane set to sweep Windies into the shadows

Decision to pull out of India tour leaves the WICB fighting for its existence with an off-field storm building
Indiana serial killer? Man arrested for murdering teenage prostitute confesses to six other murders - and police fear there could be many more

A new American serial killer?

Police fear man arrested for murder of teen prostitute could be responsible for killing spree dating back 20 years
Sweetie, the fake 10-year-old girl designed to catch online predators, claims her first scalp

Sting to trap paedophiles may not carry weight in UK courts

Computer image of ‘Sweetie’ represented entrapment, experts say
Fukushima nuclear crisis: Evacuees still stuck in cramped emergency housing three years on - and may never return home

Return to Fukushima – a land they will never call home again

Evacuees still stuck in cramped emergency housing three years on from nuclear disaster
Wildlife Photographer of the Year: Intimate image of resting lions claims top prize

Wildlife Photographer of the Year

Intimate image of resting lions claims top prize
Online petitions: Sign here to change the world

Want to change the world? Just sign here

The proliferation of online petitions allows us to register our protests at the touch of a button. But do they change anything?