Hong Kong at its worst

SCMP July 13 2006

The PCCW deal is a disgrace - an example of two of the worst aspects of Hong Kong. First, it's a case of government intervention in what should have been determined by the free market. Second, it is yet another example of incestuous dealing involving select major players - not least the family of tycoon Li Ka-shing - to the disadvantage of the wider investing public. They include the millions who indirectly own PCCW shares through the Mandatory Provident Fund and Tracker Fund.

It is a reminder, too, of just how much investors and the public purse have suffered from government-Li family links over the past eight years.

Would someone in government kindly explain why it is so undesirable that PCCW not sell its telecom assets to the highest bidder? Those who, rightly, condemned the United States for thwarting China's bid to buy the Unocal oil company seem remarkably silent on this topic.

What, exactly, is it that makes Richard Li Tzar-kai - and now an opaque consortium fronted by Francis Leung Pak-to - a more desirable chief shareholder than Macquarie Bank of Australia, TPG-Newbridge or any other bidder? Kowtowing to Beijing's will on a matter that is entirely one for Hong Kong sets another bad precedent for its autonomy and free market.

Ordinary investors have been deprived of the benefit of selling the telecom assets. Further, they are now stuck with a company with a confusing shareholding structure and no obvious direction. Nor is it clear what will happen to its 62 per cent owned property subsidiary, Pacific Century Premium Developments (PCPD). Will Richard Li now buy its assets? PCCW is in no-man's land, waiting for another deal that satisfies Beijing and a few tycoons.

Let us remind ourselves of PCCW's history. In May 1999, as dotcom mania was gathering pace, the as-yet unheard of PCCW placed 1.1 billion shares at just 31 cents each - mostly to those connected, in one way or another, to the leading shareholders. With investment banks fanning the flames of the mania and local media convinced that anything the Li family touched would turn to gold, the price by early 2000 had reached $28.

Supposedly expert institutions were taking share placements at $23.50. They were putting out so-called research extolling the virtues of the ambitiously named Network of the World (NOW), and claims that the company was "rolling out broadband across Asia".

The hype was accompanied by fanciful value and profit projections. Richard Li was able to use the inflated share price to acquire Cable & Wireless HKT. He didn't quite get the market top, but he sold $3.6 billion worth of PCCW shares at $15 a share. PCCW was not the only Li family entity to exploit the dotcom boom to the limit. Their other rocket-ship, Tom.com, made an equally spectacular launch, assisted by still-unexplained waivers of stock exchange rules.

From $15, PCCW's share price plummeted to a 2002 low of 80 cents, despite a helping hand from the government in the form of the under-the-table Cyberport deal. That gave it a huge chunk of land for 4.5 million sq ft of luxury residential development; in return, for the government, it built offices, a hotel and mall, supposedly creating a centre for cyber business. Cyberport is now part of Hong Kong folklore - so blatant that one would hope it is not repeatable. But the younger Li is no fool when it comes to keeping the best bits in the family. Perhaps little noticed amid all the noise about the PCCW sale has been the fact that the property assets have been hived off into PCPD.

It now owns not only most of Cyberport's profits and properties in Beijing and Hong Kong, but also the rights to redevelop telephone exchange buildings. The government originally provided the land for that purpose under private treaty grants common to utilities. But changes in technology mean that less space is needed. One exchange in Sheung Wan is already being redeveloped as flats. So, hey presto, land provided for a public utility use can now be converted to private profit!

Such is the magic of the relationship between government and the private sector.

Ends