Beijing calls the shots in HK
telecom sale By Augustine Tan
HONG KONG - This week brought a rude
awakening for anyone who still believes that Hong Kong is a
free-market economy, or that Beijing maintains a
hands-off policy towards the territory.
The wake-up call consisted of a large
chunk of Hong Kong's largest fixed-line telephone
company - PCCW Ltd - changing hands. The shares
did not go to the highest bidder, and were not
even sold at the behest of top shareholder,
Richard Li Tzar-kai, second son of legendary Hong
Kong tycoon Li Ka-shing, generally believed to be
the world's richest ethnic Chinese.
Instead, it was China calling all the
shots on the transaction, putting paid once and
for all to the largely fictitious notion of "Hong
Kong's free market system" and Beijing's equally spurious
"hands-off policy" towards
Hong Kong's economy.
In what is widely
seen as a move dictated by Beijing, a
hastily-assembled consortium headed by a Li
Ka-shing family factotum, Francis Leung Pak-to,
took Richard Li's 22.66% stake in PCCW, held by
the younger Li's Singapore-registered company, off
Li's hands for HK$9.2 billion (US$1.18 billion),
effectively sinking competing bids from
Australia's Macquarie Bank Ltd and US investment
firm Texas Pacific Group and its Asia-focused
unit, Newbridge.
It was these foreign
bids, instigated a couple of weeks earlier by
Richard Li himself, that angered Beijing -
presumably on the grounds that foreign control of
a Hong Kong telecommunications company presented a
national security risk.
The smaller of
China's two state-controlled fixed-line telephone
companies, China Network Communications (China
Netcom), owns a 20% stake in PCCW. The larger
member of the duopoly is China Telecom.
China Netcom promptly issued a statement
that the proposed sale to foreign buyers had
aroused "deep concern". This was followed quickly
by noises from the Chinese government and picked
up, equally promptly, by Hong Kong officials. None
of these parties wanted to see foreign interests
in control of Hong Kong's major telecommunications
assets. The concern was evidently "deep" enough to
prompt the older Li to catch the first flight to
Beijing to talk with Chinese officials.
Afterward, events seemed to move at
extraordinary speed. So fast, in fact, that the
Leung-led consortium appears to have completed the
deal with Richard Li even before sewing up its own
ranks. Leung made it a point to tell the media
that he might invite other investors to join in.
But he could not provide the names of other
current investors at that point when asked,
leading one wag to ask how many others were
standing in for Li Ka-shing.
Richard Li
has publicly acknowledged that he lent money to
Leung for the down payment. The consortium will
not have to make its first payment of US$500
million to Richard Li until November. The rest
will be paid in two installments by the end of
next year. But there is widespread doubt that such
a hastily-assembled consortium can call up this
amount of money at short notice - not, at least,
without some sort of backing by the older Li.
Leung has been broker to the Li family for a
long time. Li Senior provided seed money for
several of his ventures, notably Peregrine
Investments, Hong Kong's biggest corporate
casualty of the Asian financial crisis of the late
1990s.
Leung rose from humble origins. It
would not be far wrong to say that whatever he is,
he owes it to Li Ka-shing. He played a key role in
almost all the major Li family ventures in recent
times, notably the Tom.com Internet startup,
Cheung Kong Life Sciences and, of course, PCCW -
all names that countless small investors would
prefer to forget.
Pension funds in Hong
Kong, including the Mandatory Provident Fund to
which every worker contributes, as well as the
government-run Tracker Fund, hold PCCW shares
which, in the past six years, have fallen from a
high of HK$120 to less than $1 at their lowest.
Rumors about the two foreign bids helped raise the
share price above $5 in recent weeks, but it has
since fallen below that level.
In fact,
the takeover of British-controlled Hong Kong
Telecom in 2000 by Pacific Century CyberWorks Ltd
(later shortened to PCCW Ltd), then just a small
dot-com holding company, was widely seen as
symbolic of declining British influence after the
1997 handover. But the firm's shares have lost
more than 90% of their value since the peak. In
its day, Hong Kong Telecom was one of the city's
top blue chips and many small investors bought its
shares as a long-term investment for their
retirement.
These small investors were
hoping to recover some of their losses after a
foreign buy-out. Instead, they will now get a mere
38% share of the HK$1.38 billion earmarked by
Richard Li as a special dividend to minority
shareholders from his own pocket. There are an
estimated 300,000 individual shareholders in PCCW.
Investment banks and rating firms
immediately downgraded PCCW, pending further
developments. And market commentators were quick
to disparage Beijing's heavy-handed intervention.
But no sooner was the sale announced in Hong Kong
then China Netcom "welcomed" Leung's
participation, adding that he would "contribute to
the continued and healthy development" of PCCW.
Clearly, when Beijing feels the need to
intervene directly in the affairs of Hong Kong,
whether political or economic, it can be as
cynical as the best of them. For the rest of us,
the PCCW intervention may have been the final nail
in the coffin of Hong Kong's "free market" myth -
to say nothing of "one country, two systems".
Augustine Tan is a freelance
journalist based in Hong Kong.
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