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China still blind to market forces

The stock prices of Chinese private companies listed in Hong Kong have plummeted amid the torrent of publicity generated by the ignominious fates recently befalling prominent Chinese businessmen Yang Bin (楊斌) and Yang Rong (仰融). China's electricity stocks have also fallen due to the "disappearance" of Gao Yan (高嚴), CEO of China's State Power Corp. The Chinese authorities are handling the matters inappropriately, but Hong Kong's watchdog bodies cannot "interfere in China's internal affairs." Indeed, how can Hong Kong be expected to monitor the many anti-corruption cases that involve power struggles within China's top leadership? But this has cost investors unnecessary losses and damaged Hong Kong's image as a global financial center.

But the matter doesn't end there. China Telecom, which had been preparing to get listed in Hong Kong, suddenly postponed its initial public offering (IPO) due to poor investor response.

The China Telecom group, which has monopolized China's long-distance fixed-line market for half a century, is an undiluted state-owned enterprise. In May, the company completed the process of splitting into two entities -- China Telecom and China Netcom. In the eyes of China's bureaucrats, competition between the two entities means that the transformation into a "market mechanism" is complete.

China Telecom prepared to get listed and to raise foreign funds in Hong Kong in October. It was the biggest fundraising event in Hong Kong this year, with a plan to raise up to HK$28.3 billion. But the IPO underwriters informed institutional investors on Oct. 30 that the IPO plan had been shelved because of poor demand. Such a sudden cancellation of an IPO is rare in Hong Kong. By the early morning of Oct. 31, only about 80 percent of China Telecom's internationally distributed shares had been sold. Some US$600 million worth of shares remained unsold. As a result, China Telecom's underwriters -- Morgan Stanley, Merrill Lynch and China International Capital Corp -- were unwilling to absorb the massive amount of unsold shares.

But news about China Telecom did not stop here. On Oct. 30, telecom companies from Hong Kong and Taiwan made surprise announcements that they were raising the fees for phone calls to China starting Nov.1 because China had raised the connection fees dramatically. Rates in Hong Kong rose almost four-fold, but that did not fully reflect the scale of China's price hikes. In Taipei, some reports said connecting fees to China had risen by a factor of seven and a half. Chinese immigrants in the faraway US were also affected, as new phone card businesses reported five-fold to ten-fold price hikes. The media have strongly condemned such price increases. Some people in Hong Kong have even proposed a boycott, but for most people, especially business people, there's not much they can do. How can they not make phone calls?

The price hikes were dramatic and immediate. Some telecom companies did not even have the time to work out the new fee rates. Why the surprise price hikes? Because China Telecom is a monopoly enjoying enormous profits. But this round of price hikes were a result of the company's poor IPO showing in Hong Kong, which prompted the decision-makers to raise prices to increase the company's profits and attract more investors. How could they have known that such "economic hegemonism" would cause resentment among investors and push down the prices of other telecom shares on the Hong Kong market for two days in a row.

Despite the rise in the US stock market, Hong Kong's Hang Seng index fell by almost 200 points on the first day and 33 points on the second. As Chinese companies characterized by unclear asset ownerships, messy operations, fraudulent accounting and sheer greed get listed in Hong Kong, they will only damage Hong Kong's status as a financial center. Hong Kong Chief Executive Tung Chee-hwa (董建華) would do himself infinite credit just by preventing Hong Kong's fall from grace as a financial center, instead of trumpeting his unrealistic "centers" of all sorts that he wants to turn Hong Kong into.

US Secretary of Commerce Don Evans announced on June 7 that the US recognized that Russia had made a full transition from a planned, controlled economy to a market economy. In late September, China demanded that the EU grant it the status of a full market economy under the WTO's non-discriminatory principles. But the faces of the bureaucrats at China Telecom tell us that China is still a long way from a market economy.

Paul Lin is a political commentator based in New York.

Translated by Francis Huang
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