The calculus during a flight to Hong Kong recently was something like this.
Given the dramatic scale-back we've seen at Merrill Lynch & Co, not least in Hong Kong and elsewhere in Asia, we may have reached a high point in the global influence wielded by the big investment houses.
Something to cogitate upon, I thought. Must ask about this as I wander among the tall, transparent towers of the central business district. Merrill, Goldman Sachs Group and others have been the high-profile standard-bearers of the neoliberal thesis, so this could mark an important turn.
Well, I wandered. And you can't be right 100 percent of the time. While the Hong Kong market is changing shape before our eyes, it has nothing to do with receding tides. And though the process I'll try to describe here is one of maturation, it is not all good news.
Merrill cutbacks have been dramatic. It took a charge of US$2.2 billion in the fourth quarter of last year to cover 9,000 job cuts. Headcount is now down 22 percent from its peak in 2000 -- to 57,000, which puts it back to 1996 levels.
Hong Kong has been nothing like immune. Prominent among the departing masters of the Merrill universe is Richard Margolis, head of strategic planning for Asia and possessor of one of the best pair of China-watching eyes I know of. In Singapore, Tommy Tan is gone as chief of investment banking in Southeast Asia. Two of many to go.
It does suggest a certain loss of vision. But let's be sure to avoid connecting the wrong set of dots.
If there's any question of a fading presence, it is among the local brokers, not the big international shops. Many are the days now when foreign houses such as Merrill are the Hong Kong market's heaviest traders. "The concentration of investment power is growing, not shrinking," Margolis tells me. "The role of the big foreign institutions is getting much, much bigger."
But what about all those layoffs, the pulling in of horns? "They've trimmed costs," Margolis tells me, "but they haven't pulled out of the footprint?"
This is a measure of a market that is more than midway in a large, long transition. The days when old Ronald Li, the chairman of the Hong Kong exchange who closed the market for four days during the crash of 1987, have long since passed into local lore.
But the problems evident in the immature market of the late 1980s and the growing influence of overseas institutions are two ends of the same process.
"It's all part of Hong Kong growing up," Margolis says.
"The need to measure up is driven by global investing interests."
Measuring up is not proving easy. The core issue now is brokerage fees, the minimum for which was until recently scheduled to be scrapped on April 1.
The government has now pushed that date back by at least a year in response to vociferous cries from the Hong Kong Stockbrokers' Association, which represents some 500 local houses.
A recent report from the association warned direly that deregulated commissions would force more than a fifth of Hong Kong's brokerages to close, costing thousands of jobs.
It's not often that the shadowed profile of Keynes shows its face so openly in the Hong Kong trading community. And there's a clear argument that this is a matter of delaying the inevitable.
Ninety percent of Hong Kong's stockbrokers account for less than 25 percent of turnover. While there are strong local shops, certainly, many of the locals stand like shacks in the path of a hurricane.
But let's look more closely at this inevitable thing. When you do, you begin to wonder whether that good old Anglo-American model is again about to be misapplied.
Where were commission rates prior to deregulation in the US market? They ran somewhere between 4 percent and 7 percent, right? In Hong Kong we're talking about disposing of a minimum of 0.25 percent, and people in the market tell me big traders have gotten unofficial rates as low as 0.08 percent. It's a shark-feed already.
What's going to happen after rates are freed? For a lot of the big houses, broking is likely to become a service used chiefly to draw other business in -- to broaden the base so as to compete in new issues, mergers and acquisitions, and so on. "Broking won't have to be profitable," a medium-sized fund manager predicts.
The knock-on effects of a market run in this fashion are considerable. Research is likely to suffer significantly as brokers scramble to cut costs, and one sector of the Hong Kong economy is likely to suffer most of all -- the small and medium-sized enterprises, the SMEs, that are in many ways the territory's backbone.
When the dust settles upon a deregulated market, the familiar names of houses still likely to conduct research will probably fit easily into a columnist's brief paragraph: Morgan Stanley Dean Witter & Co, Goldman, HSBC Holdings Ltd, Salomon Smith Barney Inc, UBS Warburg, and Merrill.
Then add a few possibles: BNP Paribas may continue on the research side, and so may Credit Lyonnais SA, DBS Vickers, and Deutsche Morgan Grenfell.
Even with the possibles, though, it is not a lengthy list. And even now the list of brokers researching stocks in the SME sector is yet more limited. The names that come to mind are only three: CLSA, BNP Paribas and Vickers DBS.
"Research dedicated to introducing small companies won't disappear," another portfolio trader says, "but it's going to diminish."
This is the downside -- the pity, even -- of the process we're witnessing in the Hong Kong market. Small companies have been a vital source of growth not just in the real economy but in the share market as well. In 1993 the market listed 300 stocks; now it lists 880, and almost all the growth -- apart from "red chips" over from the mainland -- has come from SMEs.
Yes, there's a small-cap index and a mid-cap index, but few traders bother with either; they've never found their places.
There's also a NADAQ equivalent, the GEM, or Growth Enterprise Market, but I have trouble seeing in dark basements: It's off by roughly half in the year since its inception.
Quite apart from the share markets, Hong Kong has a habit of paying only lip service to the SMEs that do so much to drive it. It should do more, and guiding change in the Hong Kong market is a clear instance where it could.
Hong Kong has bought its small brokers a year. Why not encourage them to strengthen during this interim so that the best of them can remain in the broking scene even as the big boys from across the water turn Hong Kong into a global market? Why can't they become the market's eyes and ears in the SME segment of the economy? Small and big are not mutually exclusive.
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