Thursday, January 24, 2019

David Webb: Why stock-plunges happen so often in HK

After several recent stock plunges in the market, numerous journalists have asked us why stock-plunges due to forced sales of pledged shares happen so often in HK.
The answer: it's partly because investors are often in the dark about the share pledges by controlling shareholders, so they don't know that there is a risk of a sell-off, which allows prices to rise higher than they otherwise would, particularly if the controller has been buying up stock with borrowed money. The HK Government is ultimately responsible for this darkness, because it has failed to remove a statutory exemption (section 323 of the SFO) for "qualified lenders" - banks, brokers and insurers - from having to disclose security interests (of 5% or more) in pledged shares.
And why has the Government failed to close that loophole? That's partly because the banks, brokers and insurers have a combined 3 seats in the 70-seat Legislative Council and 57 seats (including the 3 legislators) in the 1200-seat Election Committee for HK's Chief Executive. Investors and asset managers have no such seats. The system is rotten to its core. 
Feeble attempts to close the disclosure loophole can be seen as far back as a Jun-1998 consultation on the then Securities (Disclosure of Interests) Ordinance, back when the disclosure threshold was 10%. In a conclusions paper in Mar-1999, the SFC said (page 51):
"In the SFC’s view, imposing a duty on banks and licensed brokers to disclose share pledges before enforcement of security would create undue burden on their normal business activities."
The paper also contained a bunch of excuses on why substantial shareholders should not have to disclose pledges either, including "the substantial shareholder's right to privacy" and that it would "increase the compliance burden on them" and that "disclosure of the pledge itself would not provide meaningful information on the likelihood of a forced sale". We disagree. The probability of a forced sale is zero if there is no pledge, and non-zero if there is a pledge. That in itself is meaningful, and so is the extent of the pledge - the more stock that is pledged, the larger the likely size of the loan. We covered the arguments in more detail in our article of 7-Sep-2004.
Following a further consultation in 2005, the SFC concluded (pages 11-12) that there was a "lack of consensus" (that's always the case when there is opposition from vested interests to reform) but it did set up a working group on the issue, on which your editor served. Lacking any political backing to overcome the vested interests, the SFC gave up after 1 meeting.
So that's the 20-year history, and the next time there's a cluster of foreclosures and stock plunges, we'll just point journalists to this article.
In the meantime, investors can make educated guesses about share pledges by following the movement of major blocks of shares amongst banks and brokers in CCASS, using the "big changes" feature of the Webb-site CCASS Analysis system as explained here.

Saturday, May 26, 2018

A response to Mr Mukherjee of Bloomberg Business News by Pete Teo

From Pete Teo:

Dear financial journalists,

If you’ve been here a while and know the difference between crispy chicken rendang and its proper form, my apologies - please skip this post. For those who sit in offices in Singapore, Hong Kong, Beijing or London panic googling Malaysia, please read on...

The events that led up to and since the recent Malaysian general elections have few parallels in history. A kleptocracy was peacefully voted out of power against all odds. Malaysians overcame electoral fraud, restricted media, abuse of power, murders, etc to get here. It isn’t possible without fortitude. 

So this is the first thing to understand, i.e., Malaysians are angry and motivated. An 82% voter turnout on a weekday shows this. We’ve been outraged and are now motivated by the opportunity to rebuild. We understand the historic importance of this moment for our children. 

The government we voted in this time are equally determined. These are no ordinary politicians like those you’re likely used to. Most have devoted their lives to reform. Many have been persecuted and jailed. Some are supremely educated and skilled. All have a point to prove. 

This coming together of a country determined to reform and a government equally motivated to lead that reform is a powerful force. Naturally, there will be mistakes and debates along the way. But to neglect the current zeitgeist in what you write would be extremely crap journalism. 

For instance, a certain Mr Mukherjee of Bloomberg Business News wrote rather condescendingly that the new Finance Minister ought to be “tactful” when revealing the financial mess that 1MDB has bequeathed us for fear of spooking hot money. This is rubbish of the highest degree. 

Leaving aside the nonsense that hot money should take precedence over administrative transparency, it completely ignores the zeitgeist of the country - i.e. the need and willingness of Malaysians to know the truth and if required make sacrifices to set their country right again 

I personally find this insulting and lazy. It is a point of view borne out of a bubbled existence that sees the stock market as more important than real lives and communities. It typifies the tail-wag-dog logic of the mega-greedy that facilitated 1MDB in the first place. 

The truth is - notwithstanding Mr Mukherjee’s delicate sensibilities - we frankly don’t care about the short term fluctuations of the stock market. We worry about corruption, education, power abuse, communal relations - issues pivotal to the long term health of our home. 

So, if we inadvertently put a dent in your bank book in the course of correcting decades of administrative mismanagement, that’s just too bad. It’s not as if you’d shed a tear if this country went down the drain, as she almost did under the old corruptly compliant regime. 

I am not saying we don’t need your help. We do. For Malaysia to thrive we need foreign investments. But we are not stupid enough to confuse hot money with real investments that provide jobs, training, income and equitable wealth creation. With respect, neither should you. 

So please in your writings write in context of our attempt at rebirth. You might look at it as a spring clean, after which we might offer investors and speculators a destination not defined by corruption, abuse and mismanagement. It’d be a win-win situation, believe me. 

In the interim, should you lose a few bob betting in a fluctuating stock market, put it down to bad timing or misfortunate or stupidity. Try not to blame our newfound administrative transparency. It’s a good thing. Our lives are more important than your index points. Truly.