Wednesday, December 2, 2015   

Exchange face-off

Benjamin Scent

Tuesday, September 11, 2007

Financial Secretary John Tsang Chunwah and corporate governance activist David Webb were at loggerheads yesterday as shares in local bourse operator Hong Kong Exchanges and Clearing (0388) surged to a record close.

The surge followed the revelation the SAR government has amassed a 5.88 percent stake in HKEx worth HK$9.93 billion - fueling speculation it would raise its interest even further.

HKEx's stock jumped 20.3 percent, or HK$32.10, to close at HK$190.10, with 40.46 million shares changing hands on volume exceeding HK$7.39 billion.

Webb, an HKEx independent non- executive director, said the purchase violated the government's stated principle of "big market, small government."

He estimates the Hong Kong Monetary Authority's portfolio of local equities has grown to about HK$150 billion as of last Friday, excluding the government's increased HKEx holding.

According to Webb, the government is the second-largest single investor in the Hong Kong market after Beijing.

"Whatever the real reasons for the government's purchase, it sends a very negative signal to the market as a whole, and increases uncertainty," he said.

But Tsang maintained: "The main objective is that, from a longterm perspective, the government as a shareholder may play a positive role in the stock exchange's development.

"We don't think this was intervening in the market."

He said it was his own decision to raise the government's stake in HKEx. He denied a suggestion that China's centra
l government had in- fluenced the decision.

Tsang declined to comment on whether the government would further increase its stake, citing concerns about price-sensitive information.

UBS analyst Ben Hu said: "It is likely a preparation for future integration and alliance with mainland exchanges. [The government] is likely to further increase its stake."

The government made a paper gain of HK$548.31 million on the 15.72 million new shares it bought last week at an average price of HK$155.22 each.

Although the current price surpassed all analysts' previous targets, the stock is likely to continue to be boosted by the HK$100 billion average daily turnover and the pending mainland direct investment program, according to Lehman Brothers.

Prudential Brokerage associate director Kingston Lin King-ham said HKEx is already overbought based on technical indicators and set to fall below HK$180.

"If the government stops buying in the market, I think the price cannot be supported at this level," Lin said, adding that there may be profit-taking.

HKEx shares have soared nearly 79 percent since their recent low of HK$106.30 on August 17 in the midst of the US subprime mortgage fallout.

The counter has gained 122 percent in the year to date, compared to just 20 percent for the Hang Seng Index.

HKEx is now the world's most expensive bourse operator, with a price to earnings ratio of 54 times, compared with 36 times for NYSE Euronext, and 30 times for the Nasdaq.

Legislator Chim Pui-chung said further volatility in HKEx's share price could be avoided if HKEx could do a placement of new or existing shares.

Some analysts and market watchers said the move seemed to break away from previous guidance on how active the government should be in the market.

"We are disappointed with the government's enigmatic market intervention," said Citigroup analyst Bob Leung. "We question the suitability of [Ronald] Arculli's dual role as `independent chairman of HKEx, while he serves also as a member of the Executive Council."

Leung, noting the government suggested its holding in the bourse operator would better enable it to promote HKEx's strategic development, said the bourse operator is sacrificing its independence for long-term potential.

He said the purchase does not seem to fit in with Exchange Fund objectives, which require the fund be used primarily for purposes such as defending the value of the Hong Kong dollar.

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