Government Backs Cartel
24th January 2002

The Hong Kong Government, which owns no shares in Hong Kong Exchanges and Clearing Ltd (HKEx) but still appoints the majority of its directors, has caved in to pressure from a small but vocal minority to use that power to maintain anti-competitive price-fixing practices in Hong Kong's brokerage industry. In doing so, the Government demonstrates that despite all its claims of a free market, Hong Kong's economy is still a system of cartels where the Government puts vested interests ahead of economic competitiveness.

Hong Kong's small brokerage firms, whose owners were paid off handsomely when HKEx was created, are living in the past. The New York and London commissions were deregulated in 1975 and 1986 respectively, and they remain world-class markets employing tens of thousands of brokers.

Unfortunately, Hong Kong still has no organisation to represent investors in this debate. We call on the Government to table enabling legislation to create and fund HAMS (the Hongkong Association of Minority Shareholders) through the Good Governance Levy. You can't have a world-class market if it is dominated by vested interests.

Webb-site.com editor David Webb is a member of the informal SFC Shareholders Group, established with government approval, which meets every couple of months and is sometimes consulted by the SFC on matters affecting investors, but we can confirm that the group was not consulted on the government's move.

If Hong Kong had a comprehensive and fair competition law, as most modern economies do, then the price-fixing arrangement for broking would be illegal. The Consumer Council in 1996 called for such a law but the government continues to reject it, claiming that a sector-specific approach is better. The example of brokerage rates demonstrates that the sector-specific approach is in fact a selective approach where vested interests are protected at the expense of consumers and for political ends.

Readers may recall our debate article against Financial Secretary Antony Leung in the FT Survey last July and his opposing article on behalf of the Government. He wrote then:

"the government will not hesitate to take action to eliminate business practices that limit market access or impair economic efficiency or free trade."

But the government is indeed hesitating to eliminate price-fixing in the brokerage sector.

As recently as 14-Nov-01, Legislative Councillor David Chu Yu-lin asked the Government a loaded question about the effect of the long-awaited deregulation on lay-offs and closures in the brokerage industry. Mr Chu is one of the 6 legislators appointed by the same 800-member Election Committee that will soon re-appoint the Chief Executive of Hong Kong, Mr Tung Chee-hwa. That business-dominated committee includes 24 members from the Financial Services and Finance sub-sectors. Mr Tung, who is likely to be unopposed, is currently trying to get as many signatures as possible on his nomination form.

For those who don't' know, and the question didn't mention it, Mr Chu's wife is Mrs Chu Ho Miu Hing, who is Managing Director of a small brokerage called Good Harvest Securities Co Ltd. Mr and Mrs Chu are the Chairman and Vice Chairman of HK-listed property company Wah Tak Fung Holdings Ltd, and on 2-Nov-00 Mrs Chu was reprimanded by the SFC for propping up the closing price of the company on the Stock Exchange.

Anyway, we digress. Back to that legislative council question. In reply, Stephen Ip, Secretary for Financial Services, pointed out that Hong Kong was the only remaining market in the 15 largest markets of the world where brokerage rates were rigged, Taiwan having been the last to deregulate on 1-Jul-00. He added:

"The liberalisation of commission rates will create an environment conducive to free competition in the stock market. To meet the challenges of globalisation and technological advancement, Hong Kong must keep up with international developments and remain competitive"

"To allow sufficient time for the industry to adapt to the change, the Board of HKEx passed the decision to provide a two-year transitional period, thus deferring the liberalisation of brokerage commission for two years to April 2002.

About turn

Just over two months later, and reportedly after intervention by the Chief Executive of Hong Kong, Mr Ip yesterday reversed course, telling small-broker lobbyists that the abolition would be delayed by at least 12 months, and now his spokesperson is saying (today's SCMP):

"With the current high unemployment rate and economic downturn, it is obviously not the right time to abolish minimum brokerage commission."

You will notice that the Government didn't dare put out its own press release, instead allowing the bad news to be broken by the brokers who asked for it, and then hiding behind anonymous "spokesperson" briefings to the media. This is a stark contrast to the fanfare which greeted the announcement of deregulation nearly two years ago. Then, the HKEx made an announcement quoting its Chairman Charles Lee Yeh-kwong, who is also one of Mr Tung's Executive Councillors, and the Government issued a press release hailing the move. Mr Lee said back then:

"The liberalisation of brokerage commission rates... we believe, is in the interest of the investing public, the brokerage industry and the economic well-being of Hong Kong"

He was right then, and the Government is wrong now. There can be no economic justification for anti-competitive practices. Many sectors of the economy are going through some pain as they adjust, but the Government wouldn't dream of introducing say, minimum prices for meals in restaurants, to save jobs in the restaurant trade, or minimum prices for food in markets, to protect workers in the retail trade. A free market economy must have a free market in prices.

What this means for HKEx

Incidentally, let's remember that HKEx is a for-profit listed company. A reduction in brokerage costs would lead to increased turnover due to the lower friction of dealing costs, oiling the wheels of the market. HKEx gets a 0.01% turn out of each transaction (split between buyer and seller) so the more volume, the more money it makes. So the delay is negative for the profitability of HKEx.

© Webb-site.com, 2002