Note: in this letter, I estimated that the government had spent HK$120bn on its intervention. Later, on 26-Oct-98, the Government finally disclosed its holdings and said that it had spent $118bn.

The letter I wrote to the South China Morning Post
(published on Friday 4th September 1998)

Secrecy is the enemy of free-market philosophy

The Hong Kong Monetary Authority (Business Post, September 3) is setting a dangerous precedent by claiming exemption from the Securities (Disclosure of Interests) Ordinance.

The shelter it takes arises from section 66 of the Interpretation and General Clauses Ordinance which states: "No Ordinance shall . . . be binding on the State unless it is therein expressly provided."

The "State" includes the Hong Kong and mainland governments.

Relatively few pieces of legislation "expressly provide" that they apply to the State.

This exemption was last in the spotlight in relation to a legislator's attempt to gain access to her file at the Xinhua news agency last year under the Personal Data (Privacy) Ordinance, in which the SAR Government declined to prosecute Xinhua, reportedly because it was viewed as a non-commercial organ of the State.

Based on the General Clauses Ordinance, the monetary authority is also exempt from the provisions on market manipulation in the Securities Ordinance, as well as the Securities (Insider Dealing) Ordinance. If it claims exemption from one law, the market will expect the authority to behave as if these other laws also do not apply, all in the cause of "fighting speculators".

There are good reasons for providing State exemption to certain laws. For example, it would be absurd for the State to pay taxes to itself.

However, by intervening in the stock markets, the authority is taking part in what is (or was) a commercial and "free market" and should play by the same rules. To do otherwise will further distort the free negotiation of market prices, which leads to the inefficient allocation of capital and resources.

There are wider implications from having a 10 per cent shareholding. Under the exchange's listing rules, this would make the authority a "connected party" of the company and give rise to conflicts of interest. Transactions such as the granting of a ferry franchise or a land lease would require approval of minority shareholders. But if the authority chooses not to tell us about its holdings, how can we know whether it is "connected"?

After last Friday's "money-no-object" binge, I estimate that the authority has spent a combined $120 billion, which was about 7.5 per cent of the market value of the Hang Seng Index. Some of these stocks are less liquid than others, so the percentages would be higher in some cases and lower in others.

Excluding HSBC Holdings, on average around half of each company is held by controlling shareholders, which means that the authority has bought about 15 per cent of the "free float" and more than that in some cases, in addition to the smaller amount of equities it held before intervention began.

Ironically, in June the SFC circulated a consultation paper that proposes, among other things, to amend the Securities (Disclosure of Interests) Ordinance so that the disclosure threshold is reduced from 10 per cent to 5 per cent, and to shorten the deadline for disclosure from five calendar days to two business days. The deadline for comments on this paper has been extended to September 30. While supporting this proposal, I would also urge that, to ensure a "level playing field" the legislation be amended at the same time to apply to the State.

DAVID M. WEBB
The author is a private investor and researcher.