Sin-ming Shaw notes the hypocrisy of painting Donald Trump’s racist and sexist views as representative of the poor and uneducated in America, when its elite are likely to be worse offenders

PUBLISHED : Thursday, 17 November, 2016, 10:13am
UPDATED : Thursday, 17 November, 2016, 8:07pm

Donald Trump is a consequence, not a cause, of the country’s deeply embedded racial, social and political problems.
The Democratic Party has no one to blame but itself for its electoral disaster. The media in the US has been shameful in underreporting social grievances, focusing instead on titillating tidbits on Trump’s indiscretions as a sexist, racist or, worse, representing mostly the “rural poor” uneducated white population. The truth is, Trump is far more representative of America than the media and political elite wanted to admit.

Harvard has just suspended its soccer team and Columbia its wrestling team for exchanging sexually explicit comments on fellow female athletes. Those messages made Trump’s “locker room” banter seemed tame.

Columbia and Harvard are symbols of American cultural enlightenment and incubators of the country’s past, present and future ruling elites. These institutions are for the nation’s privileged, not the rural, poor white kids. Sexual assault is so prevalent at the major universities that a special help desk for victims is now a common feature on campus.

Racism, too, remains a widespread fact of life. I was once the chief international economist at one of the country’s most prestigious asset management companies. Nearly all associates had at least one, usually two degrees from a top university.
Once, after I gave a talk to an assembly of associates, a senior partner came over to congratulate me. He said, “You are a credit to your school”, when he found out which was my alma mater. I was in my 40s.
I was momentarily stunned and responded with a meek “thank you”. An Ivy League degree at that firm was a non-event, and brilliant presentations were routine. It was doubtful he would have said the same to an associate of his own race. He, like Trump, would be surprised to be called a racist.

The Democratic Party has been out of touch with the people for a long time. In 2010, only two years into Barack Obama’s first term, voter disenchantment had already set in. That year, the Democrats lost the majority in the House. In 2014, they lost their Senate majority.
Trump defeated all of the major, better financed, Republican candidates at the primaries. He prevailed against all odds to win the nomination. The media treated him as a fair game for ridicule.
The elite in both parties failed to listen to the supporters of both Trump and Bernie Sanders, who were riding on a widespread contempt for the country’s political and financial elite. The rest, as we know, is now history.
Sin-ming Shaw, a former professional investor, was a visiting fellow at Harvard and Oxford
This article appeared in the South China Morning Post print edition as:
Sexism, racism rife at the top

HONG KONG – The massive public demonstrations by students and young members of the middle-class that have roiled Hong Kong in recent weeks are ostensibly demands for democracy. But they actually reflect frustration among a population that has been poorly governed by a succession of leaders picked by China’s central government more for their loyalty than their competence.

In fact, the current near-uprising is the culmination of a long series of demonstrations since Hong Kong’s handover from the United Kingdom to China in 1997, after Chris Patten, the last British governor failed to persuade China to allow Hong Kong to establish a genuine democratic government.

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In China’s view, Patten’s position was hypocritical, even offensive, given that the British had ruled Hong Kong autocratically. China believed that it could easily manage the same kind of “executive-led” government that had served Hong Kong well for 150 years under the British.

In order to placate Hong Kong’s restive population – which included many refugees from China – a “one country, two systems” policy was embedded in the region’s constitution, promising Hong Kong “a high degree of autonomy,” except in foreign and defense affairs for 50 years. Indeed, Hong Kong enjoys many freedoms that the rest of China lacks, including a judiciary system that is guided by British common law and independent from the executive branch.

China has yet to follow through on its second promise: that Hong Kong would elect its chief executive by “universal suffrage” by 2017. Instead, a committee – initially comprising 800 members, but since expanded to 1,200 – selects the chief executive in accordance with the Chinese government’s wishes.
Hong Kong’s first chief executive, Tung Chee-hwa, was widely viewed as a wise choice. The Western-educated heir to a shipping fortune, and unusually well connected with the global elite, Tung was thought to be a conservative, thoughtful, cosmopolitan man imbued with liberal values and free of ties to the powerful families that dominated the real-estate industry in the territory.

This perception could not have been more wrong. Tung turned out to be shallow, radical in his views, more chauvinist than China’s top leaders, and prone to rash decision-making on important policies with wide-ranging social and economic consequences. He forced out his competent chief secretary, Anson Chan, a veteran Hong Kong civil servant, for her colonial background, thereby signaling his mistrust of the entire civil service that the British had created.

It did not take long for Hong Kongers to realize that their new leader harbored a deep – and deeply flawed – “patriotic” worldview that regarded Western “values” as unsuitable for Hong Kong, the first globalized Chinese city in modern history. But it was not until Tung tried to ram through draconian internal-security legislation that many of Hong Kong’s citizens began to feel that they were being overtaken by the repressive governance from which they were supposed to be exempt. Under Tung’s leadership, mass protests became a frequent sight in Hong Kong.

The Chinese government also belatedly recognized that Tung was a liability. In 2004, then-Chinese President Hu Jintao unceremoniously dressed down Tung on live television. Three months later, Tung resigned for “health reasons” and was elected Vice Chairman of the largely symbolic Chinese People’s Political Consultative Conference.

Tung’s successor, Donald Tsang, was chosen reluctantly. But he was a senior civil servant, and seemed to be the only technocrat who could credibly hold together Hong Kong’s disaffected civil service, which China knew was indispensable to governing the territory, regardless of its British heritage. But Tsang brought his own weaknesses to Hong Kong’s government – most notably, greed.

Tsang, who enjoyed spending time with the wealthy on their yachts and in their private suites, pursued a restrictive land policy that boosted real-estate values – and thus the wealth of the land-owning tycoons. Prices rose so high, however, that real estate became accessible only to the very well-off, such as the families of high officials from the mainland. This kind of corrupt behavior earned Tsang a disgraceful exit from government.

Next came Leung Chun-ying, the current governor. Leung – who was not China’s first choice for the position – inherited a mess. But he did not do himself any favors with his cabinet choices, many of whom had mediocre records that indicated corruptibility. One of them, Paul Chan Mo-po, was tasked with managing Hong Kong’s land-supply policy, despite a history of corruption in his personal property transactions. Worse, Leung pushed forward an unpopular plan to introduce “patriotic education” to Hong Kong, stoking fear among students of a China-dictated brainwashing.

After the failure of three consecutive Chinese-selected leaders to address Hong Kong’s concerns, it is no wonder that Hong Kong’s citizens are increasingly seeking to loosen China’s grip on their government. But, for the Chinese authorities, this movement reflects an unacceptable challenge to China’s sovereignty.
In this sense, Hong Kong is locked in a vicious circle – and it is up to China’s government to break it. The fact is that Hong Kong’s citizens understand that they need China, and they have no interest in subverting the central government – nor do they have the power to do so. Their demands for democracy are simply calls for good governance. They believe that free and fair elections represent their best chance of having a competent leader – someone like Patten, China’s former nemesis, who is remembered fondly in Hong Kong.

China’s government is doing itself a disservice by demanding that Hong Kong’s citizens bow before their sovereign, while blaming “outside hostile forces” for spurring some kind of unconstitutional rebellion. Instead, it should focus on the problems created by the chief executives that it chose for the wrong reasons, and it should resolve the underlying governance problems that the demonstrations reflect.

HONG KONG – Hong Kong Chief Executive Leung Chun-ying has been dogged by scandal from his first days in office, and his personal integrity is routinely impugned by much of the public. So it is no surprise that his popularity is plummeting.
Leung has only himself to blame. He seems incapable of connecting with ordinary Hong Kong citizens, instead coming across as a shifty politician who often dodges direct questions, offers vague answers, and evades responsibility for major failings by apologizing for minor shortcomings.
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Leung staked his reputation on being able to tame Hong Kong’s absurdly inflated property market, and has failed miserably. Indeed, Hong Kong is now the most expensive city on the planet. It takes at least 13.5 years of mean household income to buy an average flat, according to one recent international survey. The comparable figure for London and New York is 7.8 years and 6.2 years, respectively.
Rising property prices are making middle-class flat owners multimillionaires, while their children – even with a good university degree – can hardly afford private housing without parental help. Leung has advocated that young people leave Hong Kong to work in less expensive countries.
Leung came into his job with a self-destructive attitude. Like his mentor, Tung Chee-hwa, Hong Kong’s first chief executive after its return to China, Leung harbors a deep antipathy toward the British and the professional civil service, a legacy of colonialism. He adheres to the Maoist idea that a country consists of “the people” and “enemies” (never mind that he was the youngest and first Chinese partner in a British property-surveyor firm in Hong Kong, and that Tung studied nautical engineering in the United Kingdom).
But treating the civil service as a potential enemy was clearly stupid, as only the civil servants know how the government actually works. Neither Tung nor Leung had any operational government experience, which was most clearly demonstrated in their indifferent attitude toward public appointments. The anti-corruption police arrested Mak Chai-kwong, Leung’s first Secretary of Development, only 12 days after he was appointed. His successor, Paul Chan Mo-po, was soon exposed as a one-time owner of slum housing.
The information that undermined both officials had been buried deep in official documents, and could have surfaced only because someone, or some group, in the civil service with access decided that it would be best to leak it. In Tung’s administration, two cabinet secretaries also had to quit following damaging disclosures. With a couple of notable exceptions, the mediocrity of most of Leung’s appointees elicited sighs even from his political allies.
The same incompetence is at the root of his failure to deflate the property bubble. While he has announced grandiose plans to increase the future supply of land for development, and has hiked the stamp duty twice, the market has figured out that he does not understand that he needs to manage expectations by removing obstacles in the current development pipeline. His measures have increased prices while shrinking the number of transactions – precisely the opposite of what is needed.
One major roadblock that Leung fails to appreciate is caused by an obscure 1981 UK Privy Council ruling, Hang Wah Chong Investment Co. Ltd v. Attorney General of Hong Kong, which gave the government unlimited authority to behave as a revenue-maximizing private monopolist. Thus empowered, the civil service has been behaving without regard to the public interest, as delays shrink supply while boosting prices. A substantial amount of floor space would have been available already if government authority were exercised responsibly.
Yet the same law could allow the Chief Executive to instruct the civil service to act to minimize social damage. Maximizing public revenue is not always consistent with the goal of social and economic stability. After all, Hong Kong is facing a clear and present danger that the property bubble will end in tears for many.
Dissatisfaction with this state of affairs is not confined to the powerless. Victor Li Tzar-kuoi, the son of Hong Kong’s most powerful property baron, Li Ka-shing, astonished the public recently, saying in court testimony that it was a “painful experience” to deal with the government’s imperious Urban Renewal Authority.
Another roadblock is the Hong Kong dollar’s exchange-rate peg to the US dollar under the antiquated currency-board arrangement, a colonial relic still used by Gibraltar, the Falklands Islands, and St. Helena (territories with a combined population of roughly 40,000). Under this system, the Federal Reserve in Washington, DC, sets Hong Kong’s interest rates and money supply.
The mantra since the handover to China in 1997 has been that this system has served Hong Kong well. But the high rate of asset inflation in Hong Kong is due partly to an undervalued currency, set at HKD7.8:$1 since 1983 (though allowed to trade within a narrow band between 7.75 and 7.85 since 2005). Market forces have set the real effective exchange rate by jacking up asset prices.
Hong Kong, a trading economy par excellence, thrives on market forces. Yet its policymakers remain frozen on the issue of the exchange rate. The betting in Hong Kong today is that, unless Leung can somehow reboot his administration, he is likely to follow Tung in leaving office before his term expires.

HONG KONG – After less than 100 days in office, C.Y. Leung, Hong Kong’s new Chief Executive, is already in political intensive care. In record time, he has managed to lose his veneer of competence, credibility, and steely leadership.
One of his cabinet appointees was arrested for corruption within two weeks of Leung’s assumption of his official duties. Another was found to have been a slumlord who owned illegal cage-like flats that he blamed entirely on his wife, denying any involvement whatsoever. Leung himself was caught with several illegal structures in his house, a violation that he exploited successfully against his rival, Henry Tang, in the election campaign.
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Leung has also distinguished himself by inciting a large swathe of school teachers and students to stage massive street protests against his hasty effort to insert a “national education” program into the school curriculum in order to “reconnect” Hong Kong’s young people with the motherland. For tens of thousands of student protesters, many with their parents in tow, the potential death of an honest education was too much to bear.

The goal of the program, inherited from the previous administration, is a good one: expand knowledge among the young about modern China. But, as Tang correctly pointed out in response to a question about the protests, the “devil is in the details.”

What triggered the uproar was the appearance of a “model” textbook, financed by the government and published by a pro-China think tank. The textbook contains mostly propaganda, including assertions that China’s one-party system is wonderful, whereas multiparty democracy as practiced in the United States has created harmful social turbulence. It offers no discussion of the lethal policies since 1949 that led to the persecution and starvation of tens of millions of Chinese. Nor does it mention the fratricidal political movements from the Great Leap Forward to the Cultural Revolution. The program was clearly meant to indoctrinate, not educate.

Massive protests forced Leung to withdraw a deadline to implement the new curriculum. He has also given the schools flexibility concerning when and perhaps how to introduce it. Since nearly all schools are dependent on government subsidies, the grant of flexibility is widely perceived to be a tactical delay. With the job security of schoolmasters at risk, most are sure to implement the program.

The protesters, led by a 15-year-old student, now a folk hero, have retreated, but that, too, is a tactical decision. The students have promised to continue to fight the program until it is scrapped.
But why does China’s government seek to impose the curriculum in the first place? After all, Hong Kong has one of the world’s most educated populations: the city has, in per capita terms, perhaps more graduates of the world’s top 20 universities than anywhere outside of Manhattan.

Nevertheless, after more than 60 years in power, the Chinese Communist Party (CCP) continues to retain a deep sense of insecurity. The Internet may be ubiquitous in modern China, but YouTube and Facebook, so accepted as a part of normal life around the world, are still banned, and the Public Security Bureau has built a vast Internet monitoring system to filter and censor whatever China’s leaders believe they must fear.
While dissent is the lifeblood of any open society, for China it is a dangerous poison. Moreover, China fears that Hong Kong, with a population of less than eight million, might present a systemic problem as an alternative form of government, even though many Communists and their allies hold key positions in Hong Kong’s private and public sectors.

Instead of accepting that “love” cannot be enforced and must be won, Hong Kong’s over-zealous “patriots” cannot wait to show their loyalty by trying to mandate primitive propaganda. Few in Hong Kong are buying the political elite’s mantra that the national education program is the “right” thing to do. They know that practically all of the ruling elite’s children attend expensive schools in the United States and the United Kingdom, where they would be shielded from the mindless drivel at home.

Leung’s son, for example, is reportedly a student at Winchester College, one of the UK’s most exclusive boarding schools. And most, if not all, of the children of the ruling elite in Beijing are in a similar position. The daughter of Xi Jinping, the presumptive future leader who has now reemerged from an unexplained absence, is attending Harvard under an assumed name. Disgraced ex-Politburo member Bo Xilai’s hard-partying son, Bo Guagua, attended Harrow, Winston Churchill’s alma mater, then Oxford and Harvard. Their parents clearly know that “national education” is not needed for a good education.

Unfortunately, Hong Kong’s younger generation is losing confidence in democracy. Popular elections do not translate into representation in a system designed by China to ensure that its allies win a majority every time. As a result, more and more young people are turning to street demonstrations to make their voices heard. And, while no one in Hong Kong wants independence from China, continued strong-arm tactics to force Hong Kong to “love” China could begin to inspire such sentiments.

Leung’s tone-deafness to popular feeling revives one of the main issues that he managed to dodge during the election campaign. At the time, he denied vehemently that he was a member of the CCP. He claimed that he had only Hong Kong’s interest in mind within the limits of China’s “one country, two systems” formula. So far, however, he seems inclined to make one of those systems resemble the other.

But China’s national interest is to ensure that Hong Kong remains a first-rate city, modern and open. Pulling Hong Kong down, in the name of patriotism, can only impede the advance to modernity that all of China needs to become truly great.

HONG KONG – Political mayhem has broken out in Hong Kong, and has caught China’s government, already in the midst of a delicate political transition of its own, completely unprepared.
The 1,200 privileged delegates carefully screened by China to “elect” Hong Kong’s next Chief Executive (CE) on March 25 would normally take their cues from China’s rulers. Indeed, the original electoral script was a one-act, one-star play.
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Henry Tang, unkindly nicknamed “Pig” by the Hong Kong press for his unimpressive intellect, and a heretofore supporting actor, C. Y. Leung, nicknamed “Wolf” for his perceived chilly ruthlessness, were the entire cast.
Both men have impeccable pro-China credentials, a prerequisite to becoming CE. While there is a third, pro-democracy, candidate standing somewhere in the wings, he doesn’t stand a chance, because China would never allow him to get the 601 votes needed to win.
Tang, the preferred candidate of the local business elite and the civil service he once headed, promises to preserve the status quo, which is music to the ears of Hong Kong’s “haves.” But a plot twist has complicated his shoo-in campaign, with both Tang and Leung now improvising their lines – peppered with frequent insults – and each consulting the director (China) at every turn.
At the same time, the audience, the people of Hong Kong, are howling, hissing, and throwing bottles at everyone on stage – and sometimes at each other. So, what was supposed to be a boring bit of set-piece theater has become a sensational hit.
Tang, the mild-mannered scion of a textile magnate whose father is a confidant of China’s former leader, Jiang Zemin, committed two elementary mistakes. The first was not confessing quickly enough to his having mistresses, one of whom has a college-age offspring whose father is probably Tang. Of course, Hong Kong’s citizens are far from being puritans, and the sex lives of their leaders are not a primary concern. But they also understand that anyone running for office should have been prepared for such revelations.
Tang was not. Instead, it was left to the tabloids to reveal his mistresses, one by one, week after week, like peeling an onion in front of his wife, Hong Kong’s people, and the Chinese leadership.
The second error was even more inane. Local papers discovered that he had illegally built a large, deluxe wine cellar with a spa beneath one of his mansions. As a senior public servant, he knew that the construction was illegal, and that he should have taken remedial steps to legalize his actions or to abandon it – a matter merely of money, of which he has plenty.
To everyone’s disbelief, Tang insisted that he did not have a wine cellar, just a storage room. Then he trotted out his already-humiliated wife, half in tears, to face the press, blaming her for building the cellar without his prior knowledge while “gallantly” assuming responsibility.
Tang’s popularity sank, and headed towards single digits. If China still insists on anointing him, more mayhem is likely to follow.
Leung, however, is also a deeply divisive figure – a man who comes across as someone waiting to settle scores, though no one really knows which ones. Hong Kong’s tycoons, press, intelligentsia, and civil servants, who normally agree on little, find themselves in complete agreement where Leung is concerned: they do not want him as Hong Kong’s next leader, despite his favorable popularity ratings.
The tycoons fear that Leung’s deeply old-fashioned communist values would hurt their oligopolies. The press finds him evasive. The intelligentsia is wary of him as an underground Communist Party member, something that he has denied. And civil servants believe that Leung harbors resentment of Hong Kong’s British colonial legacy, of which the civil service is the most visible.
Not even senior Communist officials in charge of the Hong Kong portfolio wanted Leung, despite his being a suspected “sleeper” cadre in the territory. Locally recruited members do not enjoy seniority in the 70-million-strong Chinese Communist Party. So, if Leung became Hong Kong’s CE, he would jump ahead of many of his seniors in China.
To complicate China’s predicament further, Hong Kong’s next leader will assume office tainted by retiring CE Donald Tsang’s undignified and possibly corrupt links with the city’s tycoons. The press calls him the “petty greedy CE.” Some legislators have called for his impeachment before he leaves office.
Tsang has been a beneficiary of favors by some of Hong Kong’s second-tier billionaires who run regulated businesses, such as radio stations and the cross-harbor tunnels. Sir Donald enjoys riding on their private jets and luxury yachts while on personal holidays abroad. Before he was shamed into giving it up, he rented a triplex penthouse for his retirement, leased to him at below-market rates by a wealthy businessman, who reportedly threw in a couple of million dollars worth of interior decoration.
Hong Kong’s citizens expect their leader to be a fair arbiter of conflicting public and private interests, not an obsequious toady to the rich. But the most pathetic aspect of Tsang’s behavior is his failure to understand that Hong Kong’s rich, whose company he pathologically craved to keep, respect only those who are richer, smarter, and perhaps more ruthless than they are. They despise those who lack serious money and can be seduced by breadcrumbs.
Deng Xiaoping promised “one country, two systems” as he negotiated Hong Kong’s return to China three decades ago. But, because China has never succeeded in overcoming its inner control freak, it has backed leaders who are incompetent, corruptible, or universally feared and scorned. Hong Kong’s upcoming “election” will be no different.

HONG KONG – Joseph Yam, the head of the Hong Kong Monetary Authority (HKMA) and a career civil servant, is retiring. Ordinarily, that should not be a newsworthy event, yet it is, and for good reasons.
Donald Tsang, Chief Executive of Hong Kong’s government, has the opportunity to restore integrity and proper governance in one of the most important statutory bodies in the territory by choosing a person solely on the basis of unimpeachable honesty and competence.
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Yam remains a hero to many in Hong Kong, including journalists unschooled in international finance. To them, he is the guardian of the Hong Kong dollar, which has been fixed at 7.8 to the US dollar for 26 years.
During the 1998 financial crisis, devaluation would have hurt those who owned local real estate but had little earnings or assets in US dollars. Not surprisingly, Hong Kong’s oligopoly of property tycoons opposed changing the peg despite the currency’s gross overvalue at the time. The 7.8 exchange rate was maintained at the cost – borne by all citizens – of six years of economic stagnation.
The currency was in theory governed by a rules-based Currency Board, which the British invented for their smaller colonies. It tied the local currency to the British Pound, giving local authorities no discretion in monetary policy.
While imperial in origin, the rationale behind the Currency Board was sound. Colonies were short on expertise. Freedom in money creation or in interest-rate policy could mean economic disaster – as, indeed, it did in many ex-colonies following independence.
Yam was always frustrated by the lack of policy freedom under the Currency Board. Before the crisis struck in 1998 he put in place measures giving him room to manipulate liquidity and interest rates. His deviation from the system also created loopholes that he did not know about or thought irrelevant.
This was precisely what the British empire-builders had wanted to prevent. When, during the 1997-98 Asian financial crisis, global investment professionals turned their attention from Thailand and Korea to Hong Kong, they quickly spotted structural weaknesses in the way the currency was managed. Local experts had previously warned Yam about this, but he dismissed their argument in a way that one economist who was present at a meeting with him described as “demeaning and contemptuous”. Moreover, they left in shock in realizing Yam, and the financial secretary, Donald Tsang, nominally his boss but without real power, didn’t really understand the experts’ economic reasoning.
Hong Kong ’s government, led by the HKMA, launched an unprecedented intervention, buying up local shares to “defeat” the speculators, but failed to stop the stampede by global investors, including conservative pension and mutual funds.
Finally, with the government about to exhaust its entire foreign reserves, Yam realized that he had to change course. He wisely accepted his critics’ suggestions, fixing the problems that he had denied existed. He was awarded the highest public-service medal by the then Hong Kong Chief Executive Tung Chi-wah, who was later ousted by Beijing for incompetence.
At this writing, Yam is widely criticized in Hong Kong for failing to protect small investors against the dishonest sales tactics of a number of banks in their selling of toxic Lehman Brothers derivatives disguised as bonds. He denies any responsibility, even though the HKMA oversees all financial institutions.
Yam is the highest-paid civil servant in the world, earning US$1.5 million last year. His salary is seven times that of the chairman of the US Federal Reserve and nearly 3 times higher than that of his own superior, the Hong Kong Chief Executive. He claims that he should be rewarded as a fund manager supervising a multibillion-dollar fund in the private sector. But, whereas private-sector professionals are fired or have their salaries reduced for poor performance, Yam wanted private-sector pay with none of the downside risk.
The HKMA’s Compensation Committee had the sole responsibility for setting Yam’s salary. But, during his 16-year tenure, Yam put his own appointees on that committee, choosing them from the financial sector that he regulates. The Committee routinely rubber-stamped his salary demands.
Yam’s retirement presents an opportunity for Hong Kong’s government to redress a major issue of governance. It should replace the compensation structure by the same civil-service scale applied to the government of which the HKMA is an integral part.
Hong Kong ’s civil servants are already the best paid in the world. Anyone seeking to compare a public-service job with the private sector in negotiating an employment contract should simply seek work in the private sector rather than for the public good. Anything else merely opens the door for corruption.
There is much speculation that Hong Kong Chief Executive Donald Tsang is about to appoint a generalist civil servant better known for his personal loyalty than for his financial expertise. Nor is there any sign that the entire HKMA pay scale should be scrapped.
Either outcome would mean that the Chief Executive has missed an opportunity to send the right signal that Hong Kong stands for good public governance rather than cronyism.

yline: As in the US, Hong Kong's mostly incompetent hedge-fund 'experts' threw caution to the wind, writes Sin-ming Shaw



The collapse of Wall Street as we knew it has revealed a fundamental flaw: the lack of competent oversight by the relevant authorities in the United States, particularly the Securities and Exchange Commission whose Republican chairman, Christopher Cox, has now admitted his shortcomings.

In Hong Kong, over the past 15 years or so, "hedge funds" focusing on the Greater China markets have appeared like the proverbial bamboo trees in the spring.

Their prospectuses touted their expertise and "experience" in Asia, their knowledge of the China market and their "long/short" strategies seeking absolute returns while managing risks prudently. Some even flaunted their "personal connections" to high-up government officials in China as part of their credentials as fund managers.

For that guanxi and other "hedging" services, they charge their clients a hefty fee (1.5 per cent to 2 per cent of assets) and 20 per cent of profits. Ordinary mutual funds do not share in profits and charge not more than 1 per cent. Many charge less.

Investors were willing to pay for their expertise and seeking "absolute returns" - meaning profits - because managing a well-run hedge fund requires skills most mortals do not have.

The old-fashioned way of managing money - known as "long-only" funds - was to buy good companies and hold them over long periods of time, come hell or high water. In the most pessimistic business environment, conservative fund managers simply sold stocks and sat on cash, lots of it, waiting for better times to re-enter the market.

But hedge fund managers claim they can benefit from bear markets by going "short". They do so by borrowing stocks they don't own, selling them and buying them back at a lower level, thereby making a profit.

At the minimum, hedge fund managers could hedge their portfolios by "neutralising" market downturns. They could do this by buying "put options" - contracts giving the owner the right, but not the obligation, to sell a security at a specified price within a certain time - on stocks or market indices. In this way, when these stocks go down, or the entire market goes down, these put options would increase in value, thereby making up for the losses in the portfolio.

This year, Hong Kong's managers of "absolute returns" specialising in the Greater China markets have proved to be mostly incapable of running a hedge fund.

With a handful of rare exceptions, all have lost money, based on figures at the end of August. Some 99 per cent of funds lost between 15 per cent and 40 per cent; some losses reached 60 per cent. The one that was boastful of its China guanxi lost over 30 per cent. Something is not right.

Did they not say they would "hedge" their portfolio of stocks if they didn't want to take a view of whether the markets would go up or down?

A hedge fund in its classical definition is a fund where no market risks would be taken and that, for each dollar of a better quality stock A bought, another dollar of a lesser quality stock B would be sold, so that, even in a bear market, stocks of better companies would go down less than the poorer-quality ones. And, in that process, money would be made.

A well-run hedge fund should not be losing money at the magnitudes seen in Hong Kong, unless they are essentially undisciplined speculative funds that are run incompetently.

Global financier George Soros has always been explicit: he is a speculator and he states that in his prospectus. Anyone who puts money with him knows that.

In Hong Kong, "hedge funds" are mostly leveraged speculative funds with a bullish bias. They are "directional" bets on rising markets. There is nothing wrong with such funds if the managers, like Mr Soros, have full disclosure at the outset instead of falsely claiming that they could manage risks while obtaining positive returns.

A good lawyer could easily build a case against quite a few of these managers.

The SEC in the US has belatedly admitted it had been asleep at the wheel. Hong Kong's Securities and Futures Commission should be proactive.

Taking away the licences of one or two particularly incompetent "hedge fund" managers who falsely advertised their expertise would be far more effective in protecting investors than following the advice of Secretary for Financial Services and the Treasury Chan Ka-keung. He said investors should read consumer reports regarding the risks of hedge funds.

Sin-ming Shaw is a former professional fund manager in Hong Kong

Hong Kong Monetary Authority chief executive Joseph Yam Chi-kwong will step down in 2009 not with a bang but with a whimper. The news that he was going, unceremoniously leaked by an anonymous government source, was a powerful signal that his presence at the HKMA is no longer required, and he is not irreplaceable.

It is rare for Hong Kong, a city usually generous to a fault, to treat in such a manner a man who many consider a hero for defeating global currency speculators in 1998.

Hong Kong's civil servants must retire at 60. Alan Greenspan, the former chairman of the US Federal Reserve - to whom Mr Yam is known to have wanted to be compared - retired last year aged 79 after having served four US presidents for a total of 18 years. Mr Yam will be 61 when he steps down, after having served 16 years, thus failing to beat Mr Greenspan on both counts.

Mr Yam had argued, in defence of his extravagant salary package (around six times that of Mr Greenspan), that his position should not be governed by civil service rules regarding pay or length of service. He may have got his financial rewards, but he has, nevertheless, failed to obtain his longed-for Greenspan-esque glory.

How is it that the news of the departure of Mr Yam, who has been feared and revered by so many for so long, was leaked to the public in such a humiliating way? Here are a few clues.

Over the years, he has not discouraged the widespread impression that he has scant intellectual respect for his boss, Donald Tsang Yam-kuen, who is now the chief executive and was formerly the financial secretary, who has statutory authority over the HKMA. That was too arrogant by half.

Second, Mr Yam made few bones about claiming credit for his "victory" against the speculators in 1998. In fact, many in the private sector thought - correctly - that Mr Yam should have been fired for his initial incompetence. After realising his mistakes, he finally unveiled his now-famous "seven measures" - suggested to him a year earlier by respected local economists. Without those measures, he would have pointlessly exhausted Hong Kong's reserves in five more trading days.

The first paragraph of the official announcement at the time all but acknowledged this. It said: "The HKMA introduced ... a package of technical measures to further strengthen the currency board arrangements and make them less susceptible to manipulation."

The attacks on the Hong Kong dollar and the massive sell-off of Hong Kong stocks, even by the most conservative pension funds around the world, came about precisely because every professional knew about this "susceptibility".

Baptist University professor Tsang Shu-ki, a currency expert, tried to alert the HKMA as early as 1996 to the fact that the currency system was vulnerable.

Global investors correctly concluded that Mr Yam was providing them with a virtual ATM machine to make a quick profit.

Then there is the fact that, in carving out a de facto empire at the HKMA, Mr Yam began to act as if the life and death of the Hong Kong dollar rested on his expertise alone.

To circumvent civil service rules, he floated the idea that, as head of the HKMA, he was also a fund manager and therefore should be paid as such. It was easy to get what he wanted: the Exchange Fund Advisory Committee, which rubber-stamped his package, is made up mainly of bankers regulated by the authority.

The manner in which all this was done alienated him from many senior financial professionals in the private sector, as well as his cohorts in the government.

Students of classics, however, will not be surprised by Mr Yam's fate. To borrow a famous Greek saying: Those whom the gods destroy, they first make proud.

Sin-ming Shaw, a private global investor, was a guest scholar at Princeton University in 2006/2007