In an extraordinary move, the Government has said that its Mandatory Provident Fund Schemes Authority will invest part of its operating funds and compensation fund in the TraHK. This Government's blatant attempt to underwrite its own issue represents the next step on a slippery slope of Government fiddling with the markets. Who will invest next - the Airport Authority, Water Authority, or Hongkong Post?

Circular TraHK
28 October 1999

The Hong Kong Government's Secretary for Financial Services Mr. Rafael Hui Si-yan yesterday said that the Mandatory Provident Fund Schemes Authority (MPFA) would invest part of its $5bn operating funds in the Tracker Fund of Hong Kong. In addition, he said that the $600m Compensation Fund would also invest in this way, according to an article in the South China Morning Post.

This is a dramatic step because it widens Government involvement in the Stock Market beyond its original intervention through the Exchange Fund. The reason given for the Aug-98 intervention was to counter an alleged "double-play" by hedge funds seeking to profit from driving the market down by squeezing interest rates. The Exchange Fund justified its intervention on the basis of defending the currency peg.

No such justification is available for other Government arms to start punting the markets. The MPFA is a regulator of providers of Mandatory Provident Fund schemes, such as fund managers and insurance companies. Such providers are of course entitled to invest their client funds in the TraHK. Perhaps the Government is relying on a popular misconception that the MPFA will actually manage provident funds. So once and for all, let's be clear. The MPFA does not manage provident funds, it is just a regulator, like the SFC or the Telecommunications Authority.

The move is a blatant attempt to underwrite the first issue of TraHK. To the extent that the public or institutions won't buy it, the MPFA can put some of its spare cash in, creating the illusion of extra demand - but that just moves the money around in a circle, since the Government owns the MPFA. When the Provisional Legislative Council in Apr-98 approved the budget of the MPFA and gave it an operating fund, nobody expected the money to be used to play the stock market.

What next? Are we to end up with every Government arm which has surplus funds investing them in the stock market? Does that include the Airport Authority, the Registrar of Companies, the Water Authority, the KCRC, the MTRC and Hongkong Post? These companies (or operating funds) are there for set purposes, and that does not include investment management. If they have surplus funds, they should be returned to Government to cut the budget deficit.

Compensation Fund or Correlation Fund?

A second point is that the MPFA Compensation Fund, which is seeded with $600m of Government money, exists to protect consumers from default by MPF scheme providers. It is similar to the Stock Exchange compensation fund that was used to settle claims from C.A. Pacific clients last year. Such funds should be invested in low-risk assets such as cash and short-term bonds, not punted on the Hang Seng Index. They are most likely to suffer claims when markets crash and brokers hit the wall.

What would have happened if the Exchange had put all that money into the Hang Seng Index in Jul-97? The compensation fund would have shrunk at the exact same time as the market was crashing and certain brokerages were going into default.

What lock-up?

The move to allow the MPFA to buy the TraHK also creates another potential hole in the so-called "lock-up" under which the Financial Secretary agreed with the TraHK managers not to sell any more shares (other than through the "Tap") until 13-Mar-2000. That undertaking is limited to "the Financial Secretary [and] any person acting on his behalf". He would no doubt claim that the MPFA is an independent statutory corporation with its own board and is not acting on his behalf. The MPFA can then apply for the TraHK units and then sell them in the market, side-stepping the lock-up and giving the impression that the take-up of the TraHK was greater than was really the case.

All that bluster about "exceptional circumstances" for last year's "market incursion" will be seen by investors as hot air if the Government starts using surplus operating funds to play the markets. So come on Mr. Hui, let's have an undertaking that no Government owned entity or corporation will invest in the TraHK or any other stock. 

© Webb-site.com, 1999

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