how to godfather part 2
How to be a Godfather, #3: Structuring an organisation – chief slaves and gweilo running dogs
‘When a man tells you that he got rich through hard work, ask him: “Whose?”’
Don Marquis
How hard does a godfather work? This is an intriguing question. Received opinion is that they work hours that mere mortals would be incapable of. Tung Chee-hwa, the shipping magnate’s son who became Hong Kong’s first chief executive, frequently made public reference to his marathon shifts, eventually claiming that the effect on his health of a lifetime of 16–18-hour working days forced his resignation from the top government post. Tycoons from Y. K. Pao to Li Ka-shing have been defined by their pre-dawn waking hours and contempt for the notion of ‘holidays’.
There is no doubt that godfathers put in the hours. But the nature of their working day is not that of a regular executive. As the chief financial officer to a Singaporean tycoon, and former executive of a major Indonesian family, reflects: ‘Do they work hard? They work their relationships …’1 This is an important distinction. In Western management terms, godfathers are commonly perceived as chief executives. But in reality their activities are more like those of supercharged chairmen: setting strategy, deal making, hobnobbing, but ultimately leaving others to execute the substance as well as the detail of what they put in train. An operating environment in which guanxi, political favour and licences are relatively more important than the inherent efficiency and global competitiveness of a business make this inevitable. Godfathers, and their immediate support staff, spend inordinate amounts of time making sure photographs of the tycoons with ascendant politicians are on display in their offices (and that images of out-of-favour politicians are taken down), organising golf games, putting tycoon homes, yachts and hotels at the disposal of persons who need to be ingratiated, resolving the problems of politicians’ wayward children and sending gifts around the world.
Golf is the base ingredient of this social–business mix. Almost without exception, godfathers play the game. In Hong Kong, for instance, the top tycoon rank – K. S. Li, Robert Kuok, the Kwok brothers, Lee Shau-kee, Cheng Yu-tung – are all long-time players and several of them own their own courses (over the border in mainland China) at which to host their guests in private. Asian dictators, too, have been big golf aficionados. Suharto played weekly, while Marcos claimed to have the lowest handicap of any world leader (his bodyguards stand accused of kicking his mis-hit shots out of the rough; playing partners said he never had a bad lie).2 Golf, more than any other activity, is the social lubricant of Asian big business. As a result, golf is part of work. As is attending weddings and funerals of business associates and politicians – what Hong Kongers dub ‘doing red and white’: red being the colour of Chinese weddings, white that of funerals. As is conducting business while eating; godfathers are rarely seen at home for meals. And as is throwing endless parties and receptions.
The average godfather day is consequently long but social. On a typical day in the life of Li Ka-shing, Asia’s richest tycoon, Li will be up before 6 a.m. and off down the hill from his home on Deep Water Bay Road, on the south side of Hong Kong island, to the nine-hole golf course next to the bay in time for a tee-off before 7 a.m. He might play with one or more of the ghetto of other billionaires who have homes close to the Hong Kong Golf Club, with one of his senior executives, or with a new business contact he wants to size up. Li arrives at the office at 10 a.m. Since the completion of the 70-storey Cheung Kong Centre that dominates the eastern side of the Central business district, this is located at the top of the chrome and glass tower, replete with a swimming pool whose roof retracts.3 Li’s first job is to check the press for anything that relates to himself or his companies. He speaks English, but prefers to read Chinese, so relevant parts of the English language papers are translated before his arrival. Li also pays close attention to what brokerage reports say about his companies. Those who provoke his ire can expect a call from one of Li’s lieutenants or a letter from his lawyers; as mentioned previously, Li has frequently had his companies withhold advertising from newspapers that upset him. When papers and correspondence are in hand, Li might pick up the phone and speak with or summon one or more senior managers. The phone system alerts them that it is the Big Boss calling. At 11.30 a.m. Li is ready for a massage. Thereafter, there is time for further administrative tasks before a 1p.m. lunch, inevitably of the working variety. After lunch, Li puts in another couple of hours at the office before heading home at 4 p.m. At 5 p.m. he will likely take another massage and then, perhaps, a game of cards with business associates at 6.30 p.m. Finally, a business dinner before he retires at 10 p.m. and the cycle begins again.4
Since everything counts as work, Li and other godfathers can claim to put in sixteen hours a day. But the task of actually running their businesses, and putting deals cut over golf or lunch into practice, falls to managers. There are many of these, but in most tycoon businesses there is a clearly identifiable person who might be called ‘the chief slave’. This is the first person who gets called when the godfather wants something done. In Li’s case it is Canning Fok, the somewhat overweight executive with a greying, pudding-bowl hair cut who can occasionally be seen in public handing Li a mobile telephone with both hands – the ingratiating Asian gesture normally reserved for name cards. Fok undertakes tasks great and small. On the one hand he has overseen the investment of more than US$20 billion in Li’s third-generation mobile telephony business. On the other, it can fall to him to bawl out equity analysts who have put a sell call on a Li company. Paul Mackenzie, a long-time analyst at brokerage CLSA who has had the Fok treatment, marvels that Fok can find the time. ‘You’d think Canning Fok had better things to do,’ he says.5 The job of the chief slave, however, is to follow the boss’s whim and act as his enforcer. Canning Fok is particularly prone to bullying. One Hong Kong source recalls listening to Fok talk about a business deal over lunch, before Li’s man said of the counter-party: ‘They are going to play ball on this and if they don’t we will crush them.’ It really was, the person says, ‘like a scene from The Godfather’.6
The chief slave is the one who puts in the hard hours. They are well-remunerated – Canning Fok may be the best-paid executive outside the United States, earning around US$15 million a year – but they do nothing but serve and obey their master, every day. Fok is rarely in bed before 2 a.m. and back in the office hours before Li. The chief slave of Lee Shau-kee, K. S. Li’s closest rival in wealth in Hong Kong, is Henderson Land vice-chairman Colin Lam. Lam owns, by Hong Kong standards, an enormous house in the territory’s Repulse Bay. But he almost never gets to live there because he spends most nights in a flat he owns on May Road on the other side of Hong Kong island. The reason he does this is to be closer to his boss, who might summon him at any moment. Indeed, serious physical impairment through overwork is a common hazard of the chief slave position. Malaysian tycoon Ananda Krishnan’s über-lackey, ethnic Indian Ralph Marshall, soldiers on despite major heart surgery in recent years. An investment banker who knows Krishnan describes his treatment of Marshall as that of ‘serial bully’. As a typical example, the source recalls Krishnan in Europe deciding to telephone Marshall over the most trivial matter. On being reminded that it was 3 a.m. in Kuala Lumpur, Krishnan responded that this was unimportant and made the call to the sleeping aide.7 When Marshall himself tells the author, ‘I’m just an office boy’, he is only half joking.8 Robert Kuok’s chief slave Richard Liu, who was on occasion reduced to tears by the stress of his work, dropped dead at Kuala Lumpur International Airport on Chinese New Year’s day 2002. Liu’s death forced Kuok back into day-to-day management.
Those closely acquainted with chief slave characters say it is not just their salaries, but the sense of power and proximity to the godfather that motivates them. The frisson of power is that much greater than in an impersonal multinational business, particularly since the tycoons’ position is more directly bound up with their political access and favour. Ultimately, however, the chief slave’s status is a mirage. He may receive share options but control of the business will never pass to him; rather it will go to the next generation of the tycoon’s family. In this sense he suffers the whim of a capricious employer for nothing.
The Outsiders’ Outsiders
The chief slave is, almost by definition, Asian. He is from the same ethnic group as the tycoon, able to speak the same languages and interact fully with the family. Another stock character in the modern godfather management cadre stands in stark contrast. This is the ethnic outsider, often a European or an American. There is a certain historical symmetry in the retention of such people. In the colonial era, Western banks and trading houses depended on compradors to intermediate business with the local population. It was an enormously profitable position, pregnant with possibilities for bribes as well as legitimate commissions. Stanley Ho’s great uncle, Sir Robert Ho Tung, was the greatest comprador of them all (for Jardine, Matheson) and the first Chinese allowed to live on Hong Kong’s Peak. Sir David Li’s maternal grandfather was a comprador for Swire. The contemporary godfather is nothing like so dependent on outsiders as the colonials were on their compradors – he is far more cosmopolitan, often having studied abroad and typically speaking English – yet the outsider is still an important component of big business success in south-east Asia. He may be required for some specialist, technical ability or to overcome the political problems that go with family business.
In the late nineteenth century, tycoons like Indonesia’s Oei Tiong Ham were already employing European engineers to help them run imported machinery. But in the post-independence era, the godfathers’ needs became more complex. Suddenly they were the ones in league with political power, holding exclusive licences and in a position to buy out or muscle out old colonial commercial interests. As their power grew, they needed to know about global markets and global capital. In this context the stage was set for the rise of what might be called the gweilo running dog (gweilo, from the Cantonese meaning ‘ghost man’, is a common euphemism in the region for a foreigner; running dog comes from the Mandarin Chinese zou gou, meaning a servile follower). Some of the godfathers’ running dogs brought nothing more than their professional management ability; others were, and are, less wholesome characters ready to engage in all manner of unseemly activities. Rodney Ward, the seasoned head of Swiss investment bank UBS in Asia, suggests that with respect to unprincipled business in the post-independence era: ‘The gweilos led the way not only in terms of degree of avarice but also in denying it had anything to do with them.’9
One of the earliest gweilo running dogs was Charles Letts, a buccaneering British expatriate who had fought alongside a communist group in the Spanish civil war and later with Thai communists during the Second World War. A Thai speaker, he was captured by the Japanese and imprisoned. After the war, he took a job with Jardine, Matheson based in Singapore and Malaysia. But in the independence era Letts was increasingly frustrated that the British hong, and its aloof taipan family the Keswicks, would not adjust to the new business environment; he suggested bringing the rising stars of the local business scene on to the board but was quickly rebuffed. Letts was friends with emerging south-east Asian tycoons like Robert Kuok and Kwek Leng Beng. In the 1960s he became one of the first expatriate deal makers to cross the racial rubicon. He teamed up with Lee Loy Seng, son of a successful Malayan-Chinese tin miner, who was moving into the plantation business. After Malaysian independence in 1957, British companies began to sell off agricultural estates, a process much expedited by the arrival of the New Economic Policy (NEP) in 1970. Although designed to further the economic interests of ethnic Malays, the NEP was in fact more readily directed against the commercial interests of the former colonial power. Letts and Lee Loy Seng made an effective partnership, with Lee indentifying businesses and land he wished to acquire and Letts travelling to London to negotiate terms. Lee Loy Seng became the biggest private plantation owner in Malaysia, concentrating on rubber and, later, palm oil. Letts, not surprisingly, became a suspect character among the expatriate establishment. Now in his late eighties, he still goes to his Singapore office each day and serves on the board of the private Lee family holding company.
As the imperial order crumbled, then, it was only natural that southeast Asia’s ascendant godfathers would find foreign talent at their disposal. Among advisers and key personnel whom Robert Kuok picked up were Jacob Ballas, an Iraqi Jew who became chairman of the Singapore stock exchange, Paul Bush, a senior British accountant with Coopers and Lybrand (now Price-waterhouseCoopers) in Malaysia, and Piet Yap, a westernised Sumatran Chinese who had worked for big Dutch trading companies in colonial Indonesia and became a key manager of Kuok’s burgeoning interests in the country. The only limit to the advantage that could be gained from hiring from a multiethnic talent pool was a tycoon’s capacity to trust outsiders. In most cases this proved a constraint. Family-based businesses were naturally suspicious of outsiders, and particularly gweilos. After all, the average tycoon had a lot of secrets that needed keeping. But one godfather, more than all others, realised that a well-paid gweilo was just as trustworthy as an Asian. That tycoon was Li Ka-shing, who became the ultimate employer of the gweilo running dog. As Simon Murray, who ran Hutchison for Li for a decade, observes: ‘K. S. is totally non-racist. He looks at people and sees the value.’10
Quite a Kennel
Li began to forge critical alliances with British expatriates in the 1970s. After he took control of the formerly British hong Hutchison in 1979, he recruited senior European and North American managers to his staff. Y. K. Pao, Li’s forerunner as Hong Kong’s pre-eminent tycoon, had what Murray calls ‘invisible gweilos’, but Li took internationalisation to a new level. While he himself operated his original real estate business, Cheung Kong, ‘Hutchison was run, over there, as “gweilo country”’, says Murray.11 The gweilos were a mix of the unctuous, the greedy and the professional – but they were all useful.
One of Li’s earliest and most enduring relationships was with Philip Tose, a man whose name is now synonymous with the collapse of the Peregrine group, until 1998 the largest Asian investment bank and brokerage outside Japan. It went down with around US$4 billion of liabilities and Tose was barred from holding company directorships in Hong Kong for four years for governance failures that contributed to Peregrine’s downfall. He had arrived in Hong Kong in 1972, sent out by his stockbroker father to get rid of expensive British expatriates and localize the staff of Vickers da Costa, then one of the largest British-owned brokers. At a time when the local broking industry was in its infancy, he wrote what he claims was the first report on a Hong Kong Chinese company by an international brokerage.12 The business in question was Li Ka-shing’s Cheung Kong. Tose subsequently told Peregrine staffers that, prior to public distribution, he sent a copy of the report to Cheung Kong. When a Li minion telephoned to point out a minor error, Tose had the entire report reprinted.13 It was the beginning of a three-decade-long working relationship with K. S. Li, whom Tose has described publicly as ‘a very close personal friend’.14 When Tose set up Peregrine in 1988, Li was one of his investors.
Tose’s stockbroking persona was that of Hong Kong’s, and Asia’s, raging bull. Prominent on the social circuit, he was a sucker for tycoons. In the early 1980s he enthused about the fraud-based business empire of George Tan, publishing a gushing special review of his Carrian group in November 1981 and affirming a new buy recommendation from Vickers shortly before Carrian went under in the biggest corruption scandal in Hong Kong corporate history.15
There were periodic allegations that Tose’s relationships with tycoons were closer than appropriate. In 1982 Hong Kong’s first insider trading tribunal revealed Tose instructed his dealers to buy as many Hutchison shares as possible in the twenty-four hours before Li Ka-shing announced his takeover of the company; a portion of the shares was for Tose’s personal family accounts. He denied trading on insider information and, supported by Li’s testimony, was exonerated. In early 1991, former Peregrine analysts say Tose intervened to stop a ‘sell’ recommendation being put out on Hutchison in a research report. ‘Philip Tose came down to the research department and rewrote it himself,’ says a former staffer.16 There is no allegation that the change in the report was linked to an investment banking deal, but it is indicative of the way Tose worked. He declines to discuss the incident.17
In early 1996 the Hong Kong bourse was filled with rumours of market manipulation when Peregrine did put out a sell call on Hutchison. The share price dropped around 13 per cent and K. S. Li stepped in to buy up large volumes of his own stock.18 Might Peregrine have helped Li acquire his own stock cheaply? Until Peregrine imploded in 1998, Hong Kong’s notoriously hands-off Securities and Futures Commission had little to say about the firm. Peregrine was censured once, in 1993, for farming out trading orders to other brokerages in a manner that made stocks it had taken to market appear more actively traded than they were.
The end of Peregrine was like the end of any un-hedged bull-market operator. The firm could not survive an economic downturn. As the Asian financial crisis unravelled in late 1997, Peregrine was caught with three-quarters of its capital lent out to just two of the more scrofulous companies in Indonesia – a Jakarta taxi firm called Steady Safe that was linked to the Suharto family and Asia Pulp & Paper, the vehicle of godfather Eka Tjipta Widjaya and the region’s biggest delinquent debtor. The money did not come back, Peregrine could not meet its obligations, and so folded, in January 1998. Li Ka-shing did not open his wallet to save Peregrine, but he did show his trademark loyalty to a trusted lieutenant. Despite all the negative publicity surrounding the Peregrine debacle and Tose’s court-sanctioned ban from running a business, he was put on the Li payroll as an adviser to Hutchison. There he remains, squirreled away on the top-most floor of Hutchison House in Hong Kong’s Central, and surrounded by paintings of his youthful incarnation as a 1960s Formula 3 racing driver. A crash which left him in hospital for four months put paid to that career. Christopher Wood, the well-known Asian equity strategist who started as an analyst at Peregrine, observes of Tose’s life: ‘He doesn’t know how to go round corners.’19
Another early gweilo recruit to the K. S. Li circle was Alan Johnson-Hill, who worked for him as his ‘general assistant’ in the late 1970s. Johnson-Hill was a former executive at Jim Slater’s Slater Walker Securities, which went on an acquisition spree in Asia in the early 1970s that included Haw Par, the business founded by Singaporean tycoon Aw Boon Haw. Slater Walker was another aggressive investment firm that went bust, involving an investigation by the Singapore government. Much of this focused on Spydar Securities, whose shareholders were senior Haw Par executives (of whom Alan Johnson-Hill was one), set up to make parallel trades on Haw Par acquisitions, and other deals, for their personal benefit. One Haw Par manager, Richard Tarling, was sentenced to prison in Singapore in November 1979. Johnson-Hill was among those who were not charged. However, suspicion of securities malfeasance did not leave him. Working for K. S. Li, he was also named by Hong Kong’s first insider trading tribunal as a purchaser of Hutchison stock – 170,000 shares – immediately before the tycoon announced his acquisition of a controlling share in the company. Johnson-Hill said he made the purchase several hours before Li told him about the deal. By the time the tribunal – to which he provided written statements but at which he did not offer himself for cross-examination – decided he had no case to answer, Johnson-Hill had returned to Europe, where he bought a vineyard in France. Hong Kong wags refer to its output as Château Cheung Kong.
The Haw Par connection continued with K. S. Li’s recruitment of George Magnus, a British manager hired to run Haw Par in Singapore after the government began its criminal investigation. Haw Par had purchased a 20 per cent interest in K. S. Li’s Cheung Kong as an investment, a stake that made Li’s company a takeover target if it fell into the wrong hands.20 A couple of weeks after Magnus resigned as Haw Par chief executive in 1978, it was announced the Cheung Kong stake had been sold to Li. Magnus subsequently resurfaced as an executive director of Cheung Kong, going on to become deputy chairman, as well as a director of other Li companies. He was with Li for more than twenty-five years before retiring to an island off Vancouver; he remains a non-executive director of Cheung Kong. In 1986 Li, Magnus and other Cheung Kong directors were found to be ‘involved in culpable insider dealing’ in Hong Kong’s second insider trading tribunal.21 The guilty verdict concerned trading in shares in International City Holdings, a Li company, and led merely to a symbolic censure, since insider trading was not made a criminal offence in Hong Kong until after the Asian financial crisis in 1997.
In 1984, Li hired Simon Murray, a former Jardine, Matheson manager who had set up his own trading business, to be Hutchison’s chief executive. Murray, well liked and respected in Hong Kong business circles, was seen by some observers as an example of another use to which a gweilo might be put. K. S. Li had recently steamrollered Hutchison’s board into paying out a special US$256-million dividend, the biggest chunk of which went to Li’s Cheung Kong, which was severely cash-strapped by the early 1980s real-estate crash.22 The payout occurred despite a public promise from Li’s previous chief executive at Hutchison that the company would not be used as a cash dispenser. It was also the time when Li was coming under suspicion for insider trading with respect to International City Holdings. In this context, Murray brought much-needed credibility that the interests of minority shareholders at Hutchison would be defended.23 He went on to run the company until 1993, when a number of differences – over everything from strategy to political views about Hong Kong’s future – led to his departure. Li, true to form, was careful to ensure the split with Murray involved a gentle let-down. He kept him on the board at Hutchison and Cheung Kong, and backed Murray to start his own private equity business. In similar vein, Li’s Hutchison had paid out nearly US$3 million in 1984 – a considerable sum in those days – to the three senior executives who were pushed out after the special dividend; they had not been happy with Li’s behaviour, but left quietly.24
As Li’s businesses expanded, more of the foreigners he brought in were employed for narrower professional tasks. Today, two Britons run, respectively, his ports and retail businesses. A Canadian holds the key role of chief financial officer at Hutchison. Whatever the gweilos do, Li’s use of them is unmatched among other tycoons. He is the ultimate embodiment of the godfather as cosmopolitan manipulator. His self-taught English is not perfectly fluent, but it is more than adequate for communicating with his gweilo lieutenants. Yet Li never uses English at shareholders’ meetings or on the rare occasions when the press pack surrounds him. At those times his identity is thoroughly Cantonese (albeit with a distinct Chiu Chow accent). The local press in Hong Kong lionised him for three decades – dubbing Li chui yan, or ‘Superman’, for taking on and beating colonial big business. Li made time for favoured Cantonese reporters. The foreign and English-language press, which showed less reverence, has rarely gained access to him. More usually, it has been the recipient of threatening letters from his lawyers. Three months before Li was among the first group of people to be named insider traders in Hong Kong in March 1986, he had secured damages, under threat of litigation, from the South China Morning Post for alleging he was exactly that.
K. S. Li is the great puppet master – though Robert Kuok is more adept at blending in to different élite cultures around the region. Li is the outstanding gweilo handler. Whether obtaining dispensations from the colonial Hong Kong government or managing a critical relationship with the Hongkong Bank (see chapter 5), and whether recruiting an amoral running dog or hiring a technical specialist, Li has done so without any apparent racial hang-ups. This is not the norm in a region where a history of colonial racial prejudice and notions of Chinese exceptionalism create all manner of ethnic neuroses. As Chris Patten, the last governor of Hong Kong, observes: ‘He didn’t allow the advantages, which were stacked up in favour of the hongs, to make him bitter.’ Li simply concentrated on what, in the long run, would make him the winner. Patten adds: ‘He’s one of the few businessmen I’ve met who is clearly a sort of genius.’25
But Why Modernise?
Li’s people-handling skills have helped make him, by most estimates, the richest godfather. While some peers keep nothing more than a token company gweilo, almost as a racial reminder of who is in charge (one such lone running dog in Hong Kong, employed by a major regional family, is sufficiently underemployed to maintain an entertaining daily blog of his activities),26 Li has dotted his empire with executives recruited from international business. However, the role that monopoly and cartels play in creating all godfather wealth must not be forgotten. In Hong Kong, some investment bankers speculate that the other two leading beneficiaries of local land policy and the real estate cartel – Lee Shau-kee of Henderson and the Kwok family of Sun Hung Kai – might be just as wealthy, if not more so, than Li if all their assets could be counted. No one disputes that there is not much net worth difference between the three. This is despite the fact that Lee and the Kwoks have done nothing more with most of their earnings than recycle them into passive investments, often overseas. For all Li Ka-shing’s perspiration in trying to build a global conglomerate with a global workforce, those who have remained focused on milking one unfree market are almost as well off.
In general, the godfathers have little to contribute to the corporate science of human resource management. They pay their chief slaves and gweilo running dogs well, because such people come from a globally traded management cadre. But the bulk of the personnel in their sprawling organisations is little more than corporate cannon fodder, with wages additionally constrained by south-east Asia’s long-time suppression of union activity and importation of cheaper foreign labour when big business demands it (Indonesians to Singapore, mainland Chinese to Hong Kong, and so on). Godfather businesses are about obtaining a share of a monopoly and then cutting costs, rather than hiring the best people in order to make a challenge in a free market. Compared with multinational companies, management systems are relatively few and relatively arcane. What matters is the will of the Big Boss. At the heart of every tycoon business is a battery of secretaries, a chief slave and a phalanx of nervous executives awaiting the next instruction of one unpredictable individual.
How to be a Godfather, #4: Banks, piggy banks and the joy of capital markets
‘I believe that banking institutions are more dangerous to our liberties than standing armies.’
Thomas Jefferson, letter to the US Secretary of the Treasury, 1802
There is, in addition to oligopolistic licences and concessions, a second resource which the south-east Asian godfather cannot do without: access to capital. In the post-colonial era, capital became readily available for the first time to local entrepreneurs because of three developments. The first was changes in the lending practices of existing banks. The second was the obtaining by well-connected tycoons of licences to open their own banks, which typically became akin to personal piggy banks, albeit ones filled with other people’s money. The third development was the growth of the region’s capital markets.
Few things constrained local businessmen so much under colonial rule as the difficulty of obtaining loans at reasonable interest. European and American banks were little concerned with lending to Asian businesses – their preferred activity was financing international trade with letters of credit and other support – and when they did lend to locals their compradors were rapacious in demanding kickbacks. There was a number of small ethnic Chinese-and Thai-controlled banks in the region, but they were extremely conservative in their lending practices. Most local businessmen turned to the traditional Indian moneylenders with their punishing rates of interest. Starting in the 1950s, however, more aggressive, entrepreneurial management at two Asia-based banks began to change this situation. The banks in question were Bangkok Bank, headquartered in Thailand, and the Hongkong and Shanghai Bank, based in Hong Kong.
The trail blazer was Bangkok Bank, led by Chin Sophonpanich, son of a Teochiu father and a Thai mother. A skilled trader and wartime black marketeer, Chin was brought in at the end of the Second World War to what was a failing institution set up under the aegis of the Thai royal family; he was employed first as comprador and subsequently as general manager. In the years that followed, Chin built out the most strongly politically-connected business in post-war Thailand, with Bangkok Bank at its centre. After the military coup of 1947, he co-opted the leadership families of Field Marshal Phin Choonhavan and police director-general Phao Siriyanon as shareholders and directors of his companies and restructured the bank to make the government its biggest shareholder. In return, he obtained a large injection of state capital, near-monopolies of gold and foreign exchange trading and the handling of overseas remittances by ethnic Chinese workers, protection from competition and an unrivalled client base. Like all the most successful godfathers, Chin also rose above the dialect differences of the Chinese community, recruiting the cream of Thai–Chinese graduates (pure Thais almost always preferred civil service careers to business) from the élite Thammasat University. One of the most important was Boonchu Rojanasathien, a Hainanese,1 who saved Chin’s bacon after Field Marshal Sarit Thanarat staged a coup in 1957. Chin quickly made Sarit an adviser and appointed his interior minister, Field Marshal Prapass Charusathiara, chairman of Bangkok Bank, but his links to the ousted Phin and Phao made him too nervous to remain personally in Bangkok. He went into exile in Hong Kong until Sarit died in 1963. In his absence, Boonchu ran the bank, backed by the most adeptly chosen management cadre in Thailand. A sense of how effectively the executives straddled the worlds of business and politics is given by the fact that, as of 1980, Bangkok Bank’s board had produced three deputy premiers and two speakers of the Thai parliament.2 But the executives were also entrepreneurial businessmen; they introduced time deposits (long-term saving) and rural credit to Thailand.
Chin Sophonpanich created the largest bank in south-east Asia and one that was extremely profitable. A report by the International Monetary Fund in 1973 claimed that Bangkok Bank’s privileged position allowed it to make returns on its capital in excess of 100 per cent a year (a claim denounced by Chin’s lieutenants).3 What was not in dispute was that the bank’s bulging deposit base could not be lent out at optimum rates in Thailand alone. This is where Chin revolutionised the south-east Asian banking scene. He personally travelled between Hong Kong, Singapore, Kuala Lumpur and Jakarta, identifying and courting the new generation of putative post-colonial tycoons. One multibillionaire remembers looking for money in the late 1950s to fund an import substitution deal for which he had obtained a licence. Having heard about Chin, he offered to come and see him. Chin’s response was that there was no need – he would come to the client. ‘For the Chinese businessmen of south-east Asia there was a major moment with Chin Sophonpanich,’ says the tycoon. ‘He broke what was then the highly conservative, highly colonialistic banking system.’4
Chin banked the key godfathers outside Hong Kong – Robert Kuok in Malaysia, Liem Sioe Liong in Indonesia, the Chearavanonts in Thailand – as well as various other players in Singapore and Hong Kong. In the mid 1970s, two-fifths of his bank’s earnings came from more than a dozen branches outside Thailand. Chin is remembered fondly by the tycoon fraternity. ‘He was absolutely charming – he had about six mistresses,’5 reminisces one billionaire who knew Chin well during his sojourn in Hong Kong. Another calls him ‘a chunk of granite’.6 Chin was also a typically amoral tycoon. He was closely linked to the Thai heroin trade through his role as personal financier to the narcotics kingpin Phao Siriyanon, and to other politicians involved in running the drugs business; his private investments, according to a friend, included quite a few girlie bars.
Tycoons are money machines, and no one sought to pass judgement on Chin. From the early 1980s, however, his star – and that of Bangkok Bank – began to fade. Chin suffered a long illness before his death in 1988, exacerbated by his fondness for alcohol (particularly brandy) as well as women. At the same time he failed to take Bangkok Bank beyond its incarnation as a regional financier of upcoming ethnic Chinese tycoons. In the 1950s and 1960s this was revolutionary, but it was not enough to sustain Bangkok Bank’s ascent. Chin was cosmopolitan enough to be banker to all Chinese, but not sufficiently so to create a truly Asian and then global institution. And when he died, management of Bangkok Bank was dominated by his children rather than the managers he had nurtured. Chin departed this world as another brilliant social chameleon. His assimilation and ‘Thai-ness’ were such that he was cremated in the Thai manner (the Chinese tradition is burial) and the pyre lit by the king himself. Yet, at his peak, he had promised so much more.
Where HSBC Came From …
It was left to a colonial firm to continue the financial revolution. The Hong kong and Shanghai Banking Corporation (HSBC) had given up its core operation in Shanghai and retreated to Hong Kong in 1949, following the communist victory in the Chinese civil war. What locals came to know as the Hongkong Bank financed many Shanghai manufacturers who fled the mainland to restart their businesses in Hong Kong. None the less it remained an inherently colonial institution. Until the 1960s the bank still employed a comprador, who guaranteed the borrowings of local businessmen. The several hundred expatriate managers who ran the business rarely met with Chinese entrepreneurs and did not directly assess their creditworthiness. Expatriates dealt with the banking needs of other expatriates.
Unlike the family-controlled British hongs, however, ownership of the Hong-kong Bank was widely dispersed – no individual was allowed to own more than 1 per cent of the shares – and its managers could rise all the way to the top of the business. It was perhaps this that led key executives of the post-war era to take a closer interest in a new generation of Chinese tycoons as their rising wealth became apparent, and to back them in takeovers of weakened colonial businesses. Racial prejudice went out of the window once it was clear the local godfathers were the key to the bank’s development as Hong Kong’s biggest business. As Leo Goodstadt, head of the Hong Kong government’s Central Policy Unit in the 1990s, wrote: ‘It [the bank] presided over an orderly and highly profitable transfer of economic control from British to Chinese companies.’7 This does not mean the Hongkong Bank was a committed free marketeer. Its relationship to the colonial administration was second to none, and allowed it to defend a uniquely privileged position. Until the mid 1990s, and the setting up of the Hong Kong Monetary Authority, it was a de facto central bank,8 issuing notes, acting as a clearing house, enjoying interest-free use of the banking system’s surpluses, acting as banker to the government and knowing much of what went on in other banks. Protected by a moratorium on bank licences from the mid 1960s to 1978, an interest rate cartel that persisted into the 1990s, and a government-supported takeover of a major local bank, Hang Seng, in 1965, Hongkong Bank built up a roughly 50 per cent share of the Hong Kong deposit base. Its pre-eminence was even greater than that of Chin Sophonpanich’s Bangkok Bank in Thailand and, like Chin, it used its capital to invest in its clients’ businesses as well as lending out its vast deposits. In this way the Hongkong Bank became the kingmaker among the Hong Kong godfathers.
The two dominant Hong Kong tycoons of the post-war era – Y. K. Pao, who died in 1991, and K. S. Li – were both catapulted above the ranks of their peers by the Hongkong Bank. In the first case, it was the bank’s decision to enter into shipping investments with Pao, and to finance them, that allowed him to become the world’s leading private ship owner. Pao was from a prosperous mainland family and had considerable experience in manufacturing, insurance and banking before arriving with his family in Hong Kong in 1949. The Paos managed to bring a good portion of their wealth with them. In the early 1950s, Y. K. Pao built a successful import–export business in the colony – assisted by the Korean War boom – before buying his first cargo ship in 1955. It was this foray into shipping that gradually alerted him to what looked like an unusually good investment proposition. The Japanese government was supporting its shipbuilding industry by issuing export credits – loans – to foreign buyers to cover up to 80 per cent of the cost of vessels at fixed interest for terms around eight years. At the same time the post-war boom meant that Japan’s large trading companies, the sogo shosha, were willing to sign long-term ship charters, typically running for more than a decade, to secure foreign-owned vessels that used cheap foreign crews. Critically, it was possible to get the trading companies’ banks to issue letters of guarantee of the performance of the charterer, making a lease rock solid. When these pieces were put together, they added up to a rather extraordinary deal. Pao could build ships in Japan, pay for most of them with Japanese government money and charter them long-term to Japanese companies whose payments were guaranteed by Japanese banks. At the end of the charter a ship was his, fully written off. As his Austrian son-in-law Helmut Sohmen, who married Pao’s eldest daughter and runs the Bergesen WorldWide shipping group,9 observes: ‘It was a banker’s mind that saw the possibility to exploit a government’s generosity.’10
Pao’s problem was that he did not have a bank. He could put down the 20 per cent he needed to front up on a few ships, but in order to take real advantage of the opportunity he required much more money. Hongkong Bank’s decision to back him was critical. It was driven by Jake Saunders and Guy Sayer, who were both to become chairmen of the bank in subsequent years, and were aware of Y. K. Pao from their work at the bank’s trade finance department. It was far from normal for expatriate managers to deal direct with Chinese businessmen – ‘There was still a colour bar,’ says Sohmen11 – but the fact that Pao taught himself English, had a background in banking and was already rich made a difference. So did the no-lose nature of the Japanese investments. Hongkong Bank went on to finance Y. K. Pao for ship purchases he made individually and became an equal partner in three joint-venture shipping investment companies.12 By 1979 Pao controlled 202 ships totalling more than 20 million deadweight tonnes – the largest fleet in the world, far larger than the Greek Onassis and Niarchos fleets combined. Hongkong Bank profited handsomely from its relationship with Pao. In 1971 it brought him on to the company’s board, and he went on to become bank vice-chairman. Pao was the bank’s first Chinese director, his appointment signalling the beginning of a trend to fill up its board room with rising Chinese tycoons.
It was only when Hongkong Bank assisted Pao’s assaults on other British-controlled businesses, however, that it really rocked the Hong Kong establishment. In the late 1970s Pao sold off a large chunk of his fleet, amassing cash for other investments. One of these was a gradually rising stake in Hong Kong and Kowloon Wharf and Godown Co., a company linked to Jardine, Matheson. When Jardine decided to see off Pao with a takeover bid in 1980, he trumped its offer with credit from Hongkong Bank and was advised by its investment banking unit, Wardley. A few years earlier it would have been unthinkable that a Chinese businessman could take anything away from Jardine. But with Hong-kong Bank’s support, Pao did so. An exemption by the stock exchange from having to make a general offer for Wharf shares he did not own showed Pao was now a real insider. In 1985 he went on to take control of another British hong, Wheelock Marden. Jardine, Matheson – once untouchable – was terrified by Hongkong Bank’s alliances with Chinese tycoons and spent much of the 1980s engaged in costly restructuring exercises to defend against further raids on its interests.
The so-called princely hong was right to be scared, for Hongkong Bank was entering the most aggressive period of its development. In the mid 1970s the bank was using its own capital to be a significant player in Pao’s shipping business, as well as owning a quarter of the Swire hong’s key asset, the airline Cathay Pacific, and a fifth of another, troubled British hong, Hutchison Whampoa. It was in dealing with this last investment that the bank forged a godfather relationship even more important than the Y. K. Pao one.
It happened on the watch of the most flamboyant and controversial of the Hongkong Bank’s post-war chief executives, Michael Sandberg, chairman from 1977 to 1986. A leader with more of a trading and deal-making background than his predecessors, Sandberg was flash by Hongkong Bank’s staid standards and, many said, greedy to boot. He left his physical mark on the bank with the construction of its current Hong Kong headquarters, a no-expenses-spared Norman Foster design that cost four times as much as the nearby, larger Bank of China building. Sandberg was still more lavish in refurbishing his own bank-provided home, Sky High, on Hong Kong’s Peak. At a strategic level, he began the globalisation of Hongkong Bank with the acquisition of Marine Midland in upstate New York in 1980. He also bought two London merchant banks and tried but failed to buy Britain’s Royal Bank of Scotland. But it is for his relationship with Li Ka-shing that Sandberg is remembered in Hong Kong. Sandberg confirmed Li as Y. K. Pao’s successor as chief godfather when he put in his hands, by way of an untendered sale, a controlling stake in Hutchison Whampoa.
The bank owned the stake as a result of a bail-out of Hutchison and its former subsidiary Hongkong and Whampoa Dock Company in the early 1970s. Like Peregrine twenty-five years later, Hutchison foundered on the rocks of risky business in Indonesia, in its case leasing activities. Hongkong Bank refinanced what became Hutchison Whampoa in return for 22 per cent of its equity, putting in an Australian manager, Bill Wyllie, to nurse it back to health. Two years after Sandberg became Hongkong Bank chairman, he decided to sell the revived business. He did so, however, without offering it around to obvious potential purchasers – the two dominant British hongs, Jardine and Swire, or Y. K. Pao, the bank’s existing Chinese tycoon partner. Instead, a deal was struck with Li Ka-shing on terms that appear extremely generous. Bill Wyllie calculated that the HK$639-million price agreed was less than half the net asset value of Hutchison’s constituent businesses, and says he had buyers lined up who would have paid much more. ‘For Li, it was a brilliant deal,’ Wyllie recalled more than two decades later. ‘The breakup value of the company was more than double the amount he paid.’13 Moreover, Li was given a deferred payment option, further reducing the effective price.
An untendered sale at a very low price begs many questions. At a strategic level, however, the decision to sell to Li was no wild punt. By 1979, when the Hutchison deal was done, K. S. Li’s Cheung Kong was already Hong Kong’s number two property company after Jardine’s Hong Kong Land. Thereafter, the prime Hutchison assets guaranteed Li’s ascent to the top of the tycoon pile. He acquired a leading position in the container port cartel, a share in the retailing duopoly in supermarkets and pharmacies with PARKnSHOP and Watsons (the other player was Jardine), and valuable land on Hong Kong island. In short, Li joined the cosy colonial commercial stitch-up that was Hong Kong’s domestic economy. He was already banking with Hongkong Bank, but in the 1980s and 1990s would put vast amounts of business their way. ‘K. S.’s present back was to do all his business through the bank,’ observes a senior Li executive.14 He was made non-executive deputy chairman of Hongkong Bank, succeeding Y. K. Pao, as the trend to fill up non-executive positions on the board with Chinese tycoons accelerated. This sent out the message to other godfathers that the bank was ready to finance them.
Sandberg developed close relationships with other major players, such as New World’s Cheng Yu-tung. Everyone (except the Keswicks at Jardine, Matheson) was happy. Hongkong Bank cemented its position as the totally dominant provider of capital in south-east Asia’s leading financial centre; Chinese tycoons were allowed to fulfil their potential and muscle in on colonial business; and the basic cartel structure of the local economy remained intact. When Sandberg retired in 1986, K. S. Li made clear the closeness of their relationship by giving him, as a leaving gift, a gold reproduction, around a metre high, of the new Hongkong Bank headquarters. A select group of guests at a dinner held at Li’s Hilton hotel was awestruck when the immodest token of affection was revealed.15 One of those present quips that the statue has doubtless since been ‘melted down’ at Sandberg’s English estate.
Playing kingmaker to the new tycoons guaranteed that Hongkong Bank’s pre-eminent position in the city state endured through the post-war era. All the big boys – even someone like Henry Fok, whose links to the Communist Party of China in theory ended his links to the British establishment – had major banking relationships with what was known in Hong Kong simply as ‘the bank’. Of course, the ability to pick winners was not entirely foolproof. Under Sandberg, there was the spectacle of the bank chairman falling for the outstanding con artist of the era, George Tan Soon-gin. Tan was a Singapore bankrupt, born in Malaysia, who arrived in Hong Kong in 1972 and over-stayed his visa by eleven years. With borrowed money, lots of bribes and limitless chutzpah, he fashioned Hong Kong’s ‘hottest’ investment company of the early 1980s, the Carrian Group. Tan’s mode of operation was reflected in an opulent wood-panelled office stuffed with expensive art and thick-pile oriental carpets. He employed a phalanx of gweilo running dog executives that further made him look the godfather part. His biggest line of finance came from the Hong Kong subsidiary of the Malaysian government’s Bank Bumiputra. But Tan’s key local backer was the man he called ‘Uncle Mike’. Sandberg fell for George Tan hook, line and sinker. He entertained him in his box at the Hong Kong races and introduced him to key businessmen in the colony. Hongkong Bank made substantial loans to Tan – Sandberg, questioned by journalists, said publicly the total was less than US$200 million. At least as important, Sandberg’s and the bank’s endorsement of Tan encouraged a roster of European and American banks to back him as well. When Carrian collapsed, amid a falling Hong Kong property market, it had debts of US$1.3 billion – Hong Kong’s biggest ever bankruptcy. The affair was powerful testimony to the power of Hongkong Bank, both direct and indirect, in the allocation of capital in the colony.
Sandberg retired in 1986 to an English peerage and a Hampshire estate, untouched by the criminal investigations surrounding George Tan’s demise.16 Nonetheless, the bank’s reputation ‘suffered a bit towards the end of his sojourn’, concedes a former senior colleague.17 Sandberg’s close relationships with George Tan and the Australian Alan Bond, another would-be Asian tycoon who went to jail, as well as his appetite for business gifts, had begun to embarrass some of his peers.18 ‘He collected funny watches. From time to time people gave him watches,’ recalls the colleague, alluding to Sandberg’s vast horology collection.19 Sandberg sold his set of timepieces at auction in 2001 for just over US$13 million and set tongues wagging once more. Whatever his personal foibles, and whatever the case for selling Hutchison in a nobid deal to Li Ka-shing, however, Sandberg concluded the economic transition in Hong Kong that began when the bank backed Y. K. Pao. Henceforth, two surviving British hongs – Swire and a much-weakened Jardine – would share power in the domestic economy with a group of Chinese tycoons. It was the result of decisions made by the supreme arbiter of capital allocation in Hong Kong, the Hongkong Bank.
Banks that Always Say Yes
Singapore had some echoes of the Hong Kong experience, with four large banks determining most access to capital. The difference was that behind those four banks, directly and indirectly, was one family, the Lees. The government stopped issuing full banking licences in 1973, restricted the business foreign banks could conduct and made local banks apply for permission to enter new product lines and launch takeovers. The biggest of the local banks is state-owned Development Bank of Singapore (DBS). The other major players – Oversea-Chinese Banking Corporation (OCBC) and United Overseas Bank (UOB) (which took over a third large private bank, Overseas Union Bank (OUB) in 2002) – are run by anglicised families whose heads have similar élite backgrounds, and are on cordial terms with, Lee Kuan Yew. The result is that local non-banking godfathers have been, if not beholden to, then extremely conscious of the need to stay on the right side of the Lee family in order to keep their credit lines open. When a family like that of Ng Teng Fong, for instance, is invited to a gathering organised by the Lees, father, son Philip (based in Singapore) and son Robert (based in Hong Kong) will drop whatever they are doing and attend in unison. Lee Kuan Yew well understood the value of controlling Singapore’s purse strings after independence, as well as its political ones.
Elsewhere in the region, the fight for access to capital played out differently. Instead of being hostage to a dominant third-party banking institution, as in Hong Kong, or a banking system under the thumb of a ruling dynasty, as in Singapore, leading tycoons prevailed on their political sponsors to let them run their own banks. This was a recipe for financial disaster, but one which governments none the less signed off on. Part of the reason was the very poor long-term performance of state banks, which always seemed to fall victim to corrupt manipulation. It was a curiosity that policy makers thought godfather banks might be better than widely owned private ones. Of course, the allocation of bank licences was the source of some of the fattest bribes in the region. The pace setter in bank mismanagement was the Philippines.
The studied abuse of the banking system by Filipino tycoons was first practised in the era of rule by the United States. The Americans, who were to some extent accidental colonists following their victory in the Spanish-American war of 1898, devolved considerable power to the local élite at the time of the First World War. From 1916, Filipinos controlled both houses of congress and directed much of the national administration, with limited oversight from an American governor-general. At the same time, the US set up the Philippine National Bank (PNB) as a well-capitalised state development bank to support modernisation; it held government deposits, issued notes and traded foreign exchange. Unfortunately, a combination of devolved political power, a weak bureaucracy unable to restrain businessmen-turned-politicians, and a large bank stuffed full of money proved to be a poor combination. From the outset, PNB’s loan book grew on the basis of political favours extracted by powerful agricultural families. Directors of the bank, and their associates, were among the biggest borrowers. When local government deposits and foreign reserves held in New York ran out as a source of loans, PNB – as a quasi-central bank – was able to print money to fund further lending. By 1921, after only five years of devolution, local godfathers had not only reduced Philippine National Bank to insolvency, they had undermined the currency and left the central government on the edge of bankruptcy.
It was an impressive start by the tycoons and a harbinger of things to come after independence in 1946. In this era, the emphasis in the financial sector switched to the creation of new private banks, concurrent with legal constraints on the activities of foreign institutions. The number of private commercial banks increased from one in the late 1940s to thirty-three in 1965. Paul Hutchcroft, the leading academic specialist on the Philippine financial system, observes: ‘Nearly every major family diversified into banking.’20 Government, which became the plaything of the business oligarchy, supported the new banks with low requirements for capital, state deposits, central bank relending and guaranteed foreign exchange swaps. The families behind the banks, meanwhile, took the money in them and lent it to their own companies and those of their friends. As former central bank governor Gregorio Licaros told the Far Eastern Economic Review in 1978: ‘The average Filipino banker is in banking not for banking profits; he uses his bank for allied businesses.’21
No one has ever been successfully prosecuted for illegal related-party lending in the Philippines and yet every bank crisis has involved it. The crises began in the mid 1960s and never stopped. A run on Republic Bank, the third-largest private institution, in 1964 set the tone. The politically well-connected bank’s loan portfolio was able to grow fast because half its deposit base was made up of government money. Huge loans were extended with insufficient or no collateral, and about half of these went to members of the bank’s board. When a run on the bank pushed it to the brink of insolvency, the central bank ordered a takeover by PNB. But Republic Bank’s controlling shareholder, liquor and lumber tycoon Pablo R. Roman, had other ideas. He was elected to a seat in congress at the 1965 election, became chairman of the House Committee on Banks, Currency and Corporations, and sued the central bank for its treatment of Republic Bank. He won a series of cases on the basis that the central bank was ‘arbitrary’ in its behaviour, and he was restored as president of his bank in 1968. Similarly, the supreme court annulled the liquidation order of Overseas Bank of Manila, run by tycoon Emerito Ramos, after it was taken over by the central bank in 1967 because of massive insider lending and other regulatory infringements.
In the Marcos martial law era, the abuse of banks became worse. After promising to rid the country of ‘an oligarchy that appropriated for itself all power and bounty’,22 he and his inner circle of godfathers obtained control of a dozen banks. Lucio Tan, the supreme Filipino godfather who has survived ever since, gained contol of Allied Bank out of the ashes of General Bank and Trust Co. (Genbank), which was stricken by runs in 1976 after it lent out much of its money to its principal shareholders. Tan, who often co-invested with Marcos, and associates ‘bought’ Genbank in a 1977 auction that was held with only three days’ notice. In 1990, the Philippine Commission on Good Government alleged he paid a sum that was less than 1 per cent of Genbank’s estimated value at the time.23 Tan was then granted an entirely new bank licence and Genbank became Allied Bank, which went on to benefit from a stream of central bank loans and central bank guarantees of foreign borrowing; in two years it was the third-biggest bank in the country.
Tan had at least proven himself in business before, unlike most Marcos cronies. Roberto S. Benedicto, Marcos’s classmate at the Philippines Law School, favourite golf partner and frequent business front, was first handed the chairmanship of the Philippine National Bank and later allowed to take over two private banks. He and his friends plundered them all; one of the institutions, Republic Planters’ Bank, was able to fund half its lending with central bank funds.24 Herminio Disini, who married Imelda Marcos’s first cousin, was also given control of two banks; the money in them saw him expand from an office with one secretary and a messenger in 1969 to a 50-company conglomerate ranging from petrochemicals to nuclear power by the mid 1970s.25
Such antics caught up with the Philippines in the early 1980s, when the debt-laden regime defaulted on its foreign borrowings and several banks failed.26 After the departure of Marcos in 1986, however, the government of Cory Aquino bailed out the banking system by issuing high-yielding government bonds and providing additional, cheap government deposits. The cost of this action became apparent in 1993 when the old central bank was closed down with a US$12-billion write-off to be born by the treasury, and hence taxpayers. The annual cost of servicing this debt in the mid 1990s was more than the Philippines’ health budget.27 Those tycoons who did not, like Benedicto and Disini, flee with Marcos, and survived the Philippine Commission on Good Government, found their banks revived with public money and able to enforce cartel pricing that in the late 1990s gave them the best banking margins in Asia. Despite all the trading and production cartels and monopolies sanctioned by Marcos and others in the Philippines, Paul Hutchcroft concludes that the banking sector has always been ‘the country’s most heavily fortified bastion of privilege and profits’.28
Bank Galaxy
Indonesia’s variation on the theme of bank plunder stands out because of the sheer number of banks that were allowed to operate prior to the Asian financial crisis – no fewer than 240. By the mid 1990s every major business in the country, and many lesser ones, had a captive bank, leading to an orgy of related-party lending that teed up the financial system meltdown of 1997–8. Not only did regular godfathers have banks, Suharto’s children had banks, Suharto’s bribe-gathering foundations owned banks and different factions of the military had banks.
As with many bad ideas, Indonesia’s galaxy of banks had its origins in a well-meaning effort to resolve a perennial problem. Like the Philippines and Malaysia, post-independence Indonesia had a long-running issue with state banks that were manipulated by godfathers and corrupt politicians to fund investment projects that did not merit loans. By the late 1980s, the proportion of loans in state banks on which interest or principal, or both, was not being repaid was around one-fifth, and the situation was set to deteriorate further in the 1990s.29 The way forward, government technocrats decided, was to deregulate the financial system and introduce more private banks that would be profit-oriented. Unfortunately, deregulation was implemented without a strong regulatory framework and, more important, the rules that were written were frequently not enforced. The paid-in capital requirement for a new bank was set at just US$12 million. Most banks quickly recouped this investment and raised more capital by listing a minority interest on the Jakarta stock exchange. Between 1988 and the mid 1990s, around 120 new banks were opened. Instead of seeking to maximise returns for their shareholders, however, they became sources of cheap funds for the godfathers who controlled them. Limits on related-party lending were never enforced by the central bank, which also failed to regulate effectively borrowing from overseas. In the wake of the Asian financial crisis, investigators revealed extraordinary levels of exposure to sister companies among the banks of the major godfathers. At Liem Sioe Liong’s Bank Central Asia, loans to affiliates were around 60 per cent,30 versus a maximum legal threshold of 20 per cent. At another of the biggest private banks, Sjamsul Nursalim’s Bank Dagang Negara Indonesia (BDNI), affiliates accounted for more than 90 per cent of lending. It was Nursalim’s wife who, rather taken by I. M. Pei’s Bank of China skyscraper in Hong Kong, asked the Chinese-American architect to build two of them, side by side, in Jakarta for BDNI. The first part of their superstructures can still be seen, a pair of concrete stubs sticking up like giant cigarette ends.
There was no shortage of clues as to where the Indonesian banking sector was headed in the 1990s. It took Edward, the eldest son of the country’s second-richest tycoon, William Soeryadjaya, only three years to create one of the ten biggest banks in Indonesia, lend himself most of its money and blow it on projects around south-east Asia. The collapse of Bank Summa in early 1993, with liabilities of around US$700 million, should have served as a powerful warning.31 Edward Soeryadjaya cost his family control of Indonesia’s main automotive company, Astra, and dropped his father way down the tycoon rankings. But other godfathers bought up the Soeryadjaya assets, the central bank took another debt on to its books and life went on.32 In 1994, one of the big seven state banks, Bapindo, collapsed under the weight of politically directed lending. In 1995 Bank Pacific, a mid-size private bank controlled by the family of former state oil chief Ibnu Sutowo, became insolvent after guaranteeing US$1 billion of high-yield offshore commercial paper, largely to fund investments by other family businesses. The central bank bailed Bank Pacific out, at the taxpayer’s expense.
With the benefit of hindsight, it should have been no surprise when, in 1997, there was a systemic crisis in Indonesia’s financial system. Greg Sirois, who ran a leasing business for Bank Summa before it went bust, says of the tycoon fraternity: ‘Everyone had a bank or two and they were catapulted into a position they were not equipped to deal with.’33 Kevin O’Rourke, a former Jakarta securities trader and author of a major work on the financial crisis, takes a longer view: ‘By revealing the true state of Indonesia’s banking system, the crisis triggered, in effect, a one-off reckoning for decades’ worth of wrongdoing.’34 As in the Philippines, however, godfathers with banks, especially large ones, were protected by the fact that the government dared not let them fail. As the crisis deepened in Indonesia from November 1997, the big tycoon bankers asked for and received central bank loans to cover demand for withdrawals. At least two-thirds of the loans went to the banks of four godfathers: Liem Sioe Liong, Sjamsul Nursalim, Mohamad ‘Bob’ Hasan and Usman Atmadjaya.35 Auditors subsequently discovered that central bank loans totalling IDR45 trillion (then about US$14 billion) were around three times the value of bank withdrawals in the period when they were disbursed. The likely explanation is that the godfathers used much of the balance of the central bank credits to buy foreign exchange (helping drive the rupiah exchange rate down at the height of the crisis) in order to shift their wealth offshore, particularly to Singapore. There is no doubt the godfathers would rather that the crisis had never happened, but when it did their involvement in banking provided an insurance policy for their interests. When the dust settled, the Indonesian Bank Restructuring Agency (IBRA) was left trying to recoup the government and central bank’s money by accepting tycoon assets whose value was often suspect. One of the most high-profile instances was when Nursalim handed over a vast shrimp farm and processing plant, which American investment bank Lehman Brothers valued at US$1.8 billion; two years later IBRA assessors wrote down its value to US$100 million. The total write-off by IBRA when it ended its efforts to clean up the financial crisis in 2004 was US$56 billion; the judiciary refused to accept almost all cases it put forward against debtors.
Where the Money Is
The line attributed to the famous American bank robber Willy Sutton – ‘I rob banks because that’s where the money is’ – would not be an inaccurate job description for a good many Asian godfathers. The havoc that tycoons wrought through their abuse of private and public banks was accentuated by the region’s unusually heavy dependence on bank finance. Before the financial crisis, bank lending accounted for between half and four-fifths of all financial assets in south-east Asian countries, compared with one-fifth in the United States. Lending in these countries in the decade before the crisis was fuelled by an average annual increase in domestic bank deposits of more than 20 per cent, as household savings rates increased. The metric was simple: ordinary people put their money in banks and godfathers took it out to finance their investments, driving a six-fold lending increase across Thailand, Malaysia, Indonesia and the Philippines between 1986 and 1996.
The financial system would have been much safer if it had been diversified across banks, equities, bonds, leasing and other instruments in a manner more similar to Europe and America. As will be seen below, equity markets in the region were expanding fast from the 1980s, but they were still relatively small and heavily manipulated by insiders. Bond markets were about one-tenth as important, in relative terms, as in developed countries. There are many reasons for this, but the simplest one is that it was just too easy for south-east Asia’s economic aristocracy to get money out of banks. Everywhere in the world, commercial banks are problematic – Nobel Prize-winning economist Merton Miller dubbed banking ‘a disaster-prone nineteenth-century technology’36 – but in the context of south-east Asia, banks were a disaster guaranteed to happen.
Perhaps the most refined and gentlemanly exponent of bank plunder was the venerable Singapore-based godfather Khoo Teck Puat, who died in 2004. He was a typical tycoon in most respects, born into a wealthy family, the son of Khoo Yang Thin, an investor in several Singapore Hokkien banks that were merged into Oversea-Chinese Banking Corporation (OCBC) in 1933. He was constantly at pains to demonstrate his simple tastes – wearing cheap clothes and buying his lunch from market stalls – while he also kept a fleet of Rolls-Royces, Mercedes and BMWs. Khoo began working at OCBC and rose to the position of deputy general manager. However, he never had control of the business. In 1959 he left and started Kuala Lumpur-based Malayan Banking Corporation, which expanded extremely rapidly, opening a hundred branches across Malaysia and Singapore in only six years. A good portion of the funds were lent out for Khoo investments, particularly in real estate, including the beginning of his large hotel portfolio in Singapore. Rumours about the scale of Khoo’s lending to himself, however, precipitated a run on the bank in 1966 and the Malaysian government forced him to give up control.
Khoo’s next bank venture was in Brunei. He persuaded the then sultan, Omar Ali Saifuddien III (father of the current sultan), to let him establish the National Bank of Brunei in 1965. Various members of the royal family were involved as minority shareholders of the bank, which was the only one domiciled in the tiny state and subject to minimal prudential oversight. Khoo was soon making large loans to himself to expand his real estate holdings in Singapore, Australia and elsewhere. The arrangement endured for two decades until Sultan Omar died, in 1986, and his son hired American investigators to examine the National Bank’s books. The loan exposure to Khoo companies was overwhelming and the new sultan shut the bank down. Khoo managed to avoid arrest, probably because he scrambled to sell assets and reached a settlement with the Brunei treasury. His son Khoo Ban Hock, who had been bank chairman, served two years in prison. The great irony of Khoo’s bank adventures was that the same year that the National Bank of Brunei went down he invested US$300 million in Britain’s Standard Chartered. That investment in a properly regulated bank was worth US$2.7 billion when Khoo died, his key asset. He also retained most of his Singapore property interests, including the Goodwood, York, Omni Marco Polo, Orchard Parade and Holiday Inn hotels.
And Then There Were Stock Markets
South-east Asia’s high savings rates, most of which flowed into bank deposits, lent themselves to outsize banking systems, which invited godfather abuse. There is, in turn, a pretty direct line from the insider manipulation of regional banks to the Asian financial crisis. The ‘over-banked’ nature of south-east Asia also helps explain a conundrum that has occupied some of the region’s equity investors: why, despite heady economic growth, have long-term stock market returns in south-east Asia been so poor? Since 1993, when a flood of foreign money increased capitalisation in regional markets by around 2.5 times in one calendar year,37 dollar-denominated returns with dividends reinvested (what investors call ‘total’ returns) in every regional market have been lower than those in the mature markets of New York and London, and a fraction of those in other emerging markets in eastern Europe and Latin America.38 Between the beginning of 1993 and the end of 2006, dollar returns in Thailand and the Philippines were actually negative; their stock markets destroyed capital. Returns in Malaysia and Indonesia were worse than leaving money in a high street bank account in an era of unusually low interest rates.39 Singapore produced less than half the gain of London or New York. Only Hong Kong approached developed market returns, but managed half those in Latin America and one-third of those in eastern Europe. Stock market performance was better in the late 1980s, but this was of little consequence to most investors because south-east Asian exchanges were so small at the time that they had almost no asset allocation from international money managers. Even if one goes back to the end of 1987, when the most commonly used Morgan Stanley Capital International (MSCI) indices for Asian emerging markets were established, every south-east Asian bourse except Hong Kong has underperformed the equity markets of the United States and the United Kingdom.40
A part of the explanation for the disappointing returns in south-east Asia’s stock markets is almost certainly the collateral impact of the region’s super-abundance of savings that are kept in banks. This pushes down borrowers’ cost of funds – particularly when the borrower controls the bank – and reduces general returns on capital. The whole of Asia suffers from the perverse curse of high savings rates and bloated banks, which have depressed stock market returns throughout the region. Long-term returns on equities have also been poor in developing north-east Asia, in Taiwan and South Korea,41 but southeast Asia has been worse. There the impact of high private savings concentrated in banks combined with the weakest prudential supervision of banks to create minimal pressure on capital markets to offer decent returns. Looked at another way, why work hard to increase a company’s stock price and pay dividends when all the capital you need is available at a real interest rate close to zero per cent from a bank whose board you control? It should be no surprise that the best stock market returns in south-east Asia come from Hong Kong which – even if Y. K. Pao and K. S. Li were critically beholden for their success to their relationships with a heavily protected Hongkong Bank – has much the most commercially driven banking system in the region. As mentioned above, no one stockholder was allowed to own more than 1 per cent of Hongkong Bank’s equity, which probably explains why HSBC is the only global bank to have grown out of south-east Asia.
When reflecting on the region’s high growth and low stock market returns it is also helpful to remember that here the universe of listed companies does not reflect the real economy. This is unusual. Japan, South Korea and Taiwan – not to mention London and New York – have branded, technology-developing export companies that are traded on their bourses alongside banks, insurance companies, retailers and the rest. But the export sector which propelled the economic lift-off in south-east Asia was dominated by multinational companies that do not have listings in their host countries; and nor do the global retailers that profited handsomely from the region’s ability to cut manufacturing costs. Instead, south-east Asian markets are dominated by a few big players in services and construction – to wit, our godfathers. This is even the case in Hong Kong, which does at least boast a few globally competitive businesses (like HSBC). If ten mainland Chinese businesses are stripped out of Hong Kong’s Hang Seng index, eight of the remaining twenty-four companies are tycoon real estate companies,42 while four are tycoon-controlled utilities. Several other companies are godfather businesses – the family of K. S. Li alone controls five Hang Seng constituent stocks. In other words, buying equities in south-east Asia is fundamentally about buying into the godfather business model; it does not allow the investor to access the foreign trade and globalisation story that has driven the region’s economies. This is another reason why south-east Asian stock markets are always likely to underperform expectations.
Finally, south-east Asia’s godfathers have not been shy about expropriating minority shareholders. Stock markets provide an excellent stage for the talents of tycoons – complex financial engineering, opaque interplay between public and private companies and the potential to ramp and bludgeon individual stocks by the timely release of insider information. Ever since the first London brokers arrived in Hong Kong in the early 1970s, triggering the first great speculative bubble in the region, it has been clear that the combination of an ill-informed public, the godfathers and a supply of scrofulous foreigners is a bad one for the minority investor. The standard for a generation of regional stock market disappointment was set by that original Hong Kong bust. In 1973, the Hang Seng index was ramped up and up to a March peak of 1,775 points before freefalling to 150. Simon Murray, then a neophyte greedy expatriate manager working for Jardine, Matheson, recalls he was punting £60,000 in the market – most of it borrowed – at a time when his salary was £2,000. He went skiing as the market hit its peak. Out on the slopes one day he suddenly realised that a cryptic telex he had received – ‘BS156’ – referred to his Butterfield and Swire stock,43 whose price had increased nine times. He crossed his skiis, he says, and wiped out, thinking of all the money. Unfortunately, the index dropped to 820 before he finished his holiday, and to 420 before his plane landed in Hong Kong. ‘That was my last visit to the stock market for quite a long time,’ he recalls.44
Sir William Purves who, unlike Michael Sandberg, is not the speculative type, remembers the era for the piles of initial public offering (IPO) prospectuses and related paperwork that impeded the normal functioning of the Hongkong Bank. ‘It was shambolic,’ he says. ‘There was so much physical paper that people could not get into the bank on IPO days.’ Purves attempted to hire Hong Kong island’s Cathedral Hall as an IPO processing centre to keep the investor frenzy out of his bank, but the Anglican church refused to have Mammon in its building. Instead, he obtained the use of the St John Ambulance station up Hong Kong island’s Garden Road ‘in the hope the climb would put people off’, which of course it did not.45
Behind the droll anecdotes, however, is the standard south-east Asian tale of godfather manipulation, ordinary folk losing their shirts and the shameless behaviour of gweilo running dogs. The defining characteristic of the 1973 bust was that, in the words of Purves, ‘The boom was pushed along to a great extent by London brokers.’46 Post-crash, the prices of many well-known stocks that listed in early 1973 – such as Cheung Kong and New World – dropped to a tenth or less of their IPO levels. First and foremost among the London brokers was Vickers da Costa. It is surely telling that three of the senior executives at the London house that led market making activities in Hong Kong at the time would subsequently end up on the wrong side of trading-related court cases. Philip Tose – ‘Tosey’ to his public schoolboy followers – was eventually banned from Hong Kong directorships for his part in the downfall of Peregrine (which in many respects was a 1990s reincarnation of Vickers da Costa, employing many of its former personnel). The second person was Ewan Launder, a Vickers director who went on to be managing director of HSBC’s investment bank, Wardley, which began its life as a joint venture with Vickers with Michael Sandberg responsible for setting it up and for approving senior management. Ewan Launder fled Hong Kong when it became clear he would be prosecuted for receiving large payments from Sandberg’s friend George Tan, after the collapse of his Carrian group in 1983; Launder spent a decade on the run before being arrested in Britain. He was eventually found guilty of accepting HK$4.5 million in return for granting Tan loans and sentenced to five years in prison, only to get off on appeal; Hong Kong’s Court of Final Appeal cited grammatical errors in the charges that had been laid. The third person, Geoffrey Collier, was one of Philip Tose’s original research analysts at Vickers in Hong Kong, who rose quickly through the ranks and went on to work for Morgan Grenfell in London, as joint global head of equities. That was a mistake. Under a more rigorous UK judiciary, Collier became the first person in Britain to be convicted of the newly criminalised offence of insider trading, in 1987.47 He made the insider trades for which he was convicted through old friends at Vickers. The school for scandal theme at Vickers did not end there. In the course of the 1990s, several more directors from the 1980s were censured or convicted for insider dealing and other offences.48 The obvious point is that before we deconstruct the godfathers’ listed businesses to see how they have shafted the minority investor, it is important to bear in mind that the foreign broking and investment banking communities have frequently been hewn from the same moral block.
Welcome to the Web
The basic mechanism for the expropriation of minority shareholders in southeast Asia is the conglomerate web, through which a godfather exercises enormous but opaque power over myriad different companies. Regular businesses – a General Electric, a Tesco, even an HSBC – have a single listed vehicle. But a godfather business has fifteen or even twenty listed vehicles that can be readily identified, with minority positions in many other listed firms that are harder to spot. As a typical example, Quek Leng Chan, Kuala Lumpur-based billionaire nephew of the late Kwek Hong Png and cousin of the Singapore-based billionaire Kwek Leng Beng,49 has nineteen clearly identifiable listed subsidiaries. These are engaged in activities ranging from banking to air-conditioner manufacturing to real estate. Quek is then also present as a small but significant investor in other listed vehicles where his ownership is harder to detect and, separately, owns scores – probably hundreds – of private companies. It is the interplay between these declared public subsidiaries, untrumpeted listed companies in which the godfather has an interest, and private companies – which in most Asian jurisdictions file no public records50 – that defines much tycoon activity. Another multi-billionaire godfather, who reckons to control somewhere between 300 and 400 companies – including about a score that are acknowledged public subsidiaries – observes: ‘We sometimes set up fifteen companies in a month.’51
After the Asian financial crisis, the World Bank commissioned a group of economists and researchers at the Chinese University of Hong Kong to review ownership data on more than 2,500 Asian public companies – spanning Japan and South Korea as well as south-east Asia (but not China) – in order to better understand the region’s corporate webs.52 The results, if they are to be believed, are stunning. The researchers concluded that the eight largest conglomerates in the region exercise effective control over a quarter of all listed companies, while the top twenty-two conglomerates control one-third of listed vehicles. The identity of the top eight conglomerates was not made public at the time, but can be revealed here: six of the eight were big Japanese industrial conglomerates (or keiretsu) – as would be expected given Japan’s industrial cross-holding tradition – and two were south-east Asian. These last two were the groups of Li Ka-shing and Malaysia’s Sime Darby, the latter connected with several powerful overseas Chinese families, as well as the Malaysian government.53 Each of the eight groups was determined by researchers to have more than twenty affiliate listed companies at the level of 10-20 per cent ownership, in addition to their more transparent public subsidiaries.54 The main aim of the researchers was to analyse the structure of the relationships in the conglomerate webs in order to understand how they work. What they discovered, again and again, is that control is exercised through pyramid arrangements that deliver levels of control disproportionate to equity ownership. For example, a company at the apex of a conglomerate pyramid (there may be several different pyramids within the overall corporate web) might own 50 per cent of listed company X, which in turn owns 40 per cent of listed company Y, which in turn owns 30 per cent of listed company Z. As a result, the conglomerate has 6 per cent ownership rights in company Z, but it still has 30 per cent voting rights – enough to call the shots. The researchers used analysis of dividend payouts, which have to be given to all investors equally, to prove that minority investors are systematically expropriated at the bottom of pyramids. This usually occurs at a level of 10-20 per cent ownership where a conglomerate’s stockholding is not widely noted but where it can still exercise control. The principals of the research project wrote a seminal paper for the American Economic Review in which their assertions were, by academic standards, bold: ‘We document,’ they stated, ‘that the problems of East Asian corporate governance are, if anything, more severe and intractable than suggested by commentators at the height of the financial crisis.’ The authors concluded: ‘The concentration of expropriation within a few groups large enough to manipulate a nation’s political system means that the critical issue is the political will to enforce laws and regulations on the books.’55
This last point is critical. A detailed review of what goes on within the big conglomerates reveals that, historically, a failure by politicians to enforce regulatory norms has been at least as important as a shortage of laws in allowing godfathers to get away with their behaviour. In a country like Malaysia, where exemptions from stock market rules are granted without media comment and information about untendered privatisations is subject to official secrecy laws, this is hardly surprising. But the observation also applies in a market like Hong Kong’s. Ever since he hooked up with the Hongkong Bank in 1979 and became part of the economic establishment, the career of Li Ka-shing, the paragon of godfathers, has been one long series of often inexplicable exemptions from stock market rules. When Hutchison took over Hongkong Electric in 1985, Li was exempted from a general offer despite exceeding the 35 per cent ownership trigger. When Hutchison increased its stake in another Li web company, Cavendish, from 23 per cent to 52 per cent in 1987, he was exempted from a general offer. Similar exemptions were granted in the same year when Li increased his personal stake in Cheung Kong above 35 per cent and Cheung Kong increased its stake in Hutchison above 35 per cent; in these instances Hong Kong’s financial secretary contradicted and overruled the stock exchange’s takeover committee. In the 1990s, Li caused jaws to drop when he secured a series of extraordinary exemptions for his internet subsidiary, Tom.com, allowing it to issue new shares within six months of its IPO, to give staff options up to 50 per cent of the value of the firm’s capital base (10 per cent is the rule), and to allow major shareholders to sell down their stakes after six months rather than the statutory two years. The Tom.com experience turned Li’s reputed paramour, Solina Chau Hoi-shuen, into an overnight US dollar billionaire – at least on paper.56 The bigger point is that stock market regulations appear not to apply to major godfathers, even in Hong Kong.
The indulgence shown to Li Ka-shing’s listed companies over the years draws attention to some of his key working relationships. The link to Hong-kong Bank, whose chairman in the colonial era was always said to be more powerful than the governor, has been established. Almost as important has been the link with Charles Lee Yeh-kwong, one of the principals of the law firm Woo, Kwan, Lee & Lo,57 who is both K. S. Li’s lawyer and key adviser. As well as legal work on investment deals, Woo, Kwan, Lee & Lo does much of the conveyancing for the property arms of Cheung Kong and Hutchison. ‘Imagine 2 per cent of all that,’ drools a senior K. S. Li executive.58 At the same time Charles Lee, who bears a passing resemblance to Toad of Toad Hall, was chairman of Hong Kong Exchanges and Clearing Limited, which runs the Hong Kong stock and futures markets, in 1992–4 and 2004–6; he is still an Executive Councilor. Another long-time K. S. Li associate, contractor and Li company director, the former real estate and construction functional constituency legislator59 turned Executive Councilor Ronald Arculli, took over as chairman of the exchanges in April 2006. That same year, he was made chairman of the Hong Kong government’s focus group for financial services reform, whose theoretical aim is to improve markets’ functioning in the interests of general investors. Elsewhere, these palpable conflicts of interest would cause a political storm; in Hong Kong they barely register.
Don’t Rock the Boat
The political cover given to godfathers around the region is both proactive and reactive. The first kind occurs when deals and favours are given to the tycoons. But the second kind, when politicians step in to defend the nexus between the political and economic élites that has existed for generations, may be just as important. Again, it also applies in Hong Kong.
A classic example occurred in 1987 when a young, brash Robert Ng, son of Singapore billionaire Ng Teng Fong, was speculating wildly in the Hong Kong futures market just as the market crashed in October that year. He had 12,000 long futures contracts, leaving him with a paper liability of just over HK$1 billion. Robert was punting the market through two Panamanian-registered companies and initially sought to deny responsibility for the debts on the basis of limited liability. Hong Kong’s Commercial Crime Bureau (CCB), however, found prima facie evidence that there was collusion between Ng and one of the firms broking the futures contracts, which allowed him to avoid paying in margin as the market declined. This would be illegal.
The CCB unearthed a high-quality informant and armed itself with warrants to search more than twenty addresses. Senior officers were convinced that, for the first time, they were about to nail a major godfather. It never happened. At a series of meetings of minister-level government officials, culminating in an encounter at the governor’s country residence at Fanling, it was decided that taking on Robert Ng posed a risk to the stability of the overall market; why this should be was never explained, publicly or privately.60 The police were devastated. One of the senior officers recalls: ‘[Chief of staff of the CCB] Russ Mason came back and said: “That’s it boys. Not in the public interest.”’61 Instead of an investigation, Robert Ng was cut a deal that allowed him to repay around 60 per cent of what he owed over eight years (equivalent to an immediate repayment of about half). The rest of the tab was picked up by foreign brokerages, which were strong-armed into making contributions by the Hong Kong government, and local taxpayers.
Interestingly, the person the police were allowed to pursue was Ronald Li, who was running the stock exchange at the time of the 1987 crash. Li made his fortune by requiring personal allocations of stock when approving IPOs and ran the exchange as a personal fiefdom. But it was his decision to shut the bourse down for a week in 1987, which caused great damage to Hong Kong’s international reputation in money markets as well as undermining futures contracts, that saw the colonial power turn on him. Li was tried over share allocations in the listings of Cathay Pacific Airways and Novel Enterprises – even though it meant pointing up in public the collusion of Hongkong Bank subsidiary Wardley in the share allocations – and was sentenced to four years in jail. He was made a rare example. The policeman quoted above observes: ‘[Former New York Attorney General] Eliot Spitzer62 would have a field day here. They’d all be going to jail. One after the other.’
Thankfully for the godfathers, south-east Asia is not New York and brazen treatment of minority investors and the general public passes for regular business. It was notable when Tung Chee-hwa became Hong Kong’s first post-colonial chief executive that his own history of shocking corporate governance elicited barely a murmur. The media was interested in the fact that Henry Fok had engineered a bail-out of Tung’s main company in the 1980s because it provided circumstantial evidence that Tung was beholden to Beijing, whose state banks provided most of the financing. But the deeper story was that Tung, the less gifted son of the late billionaire shipping tycoon C. Y. Tung, was in trouble in the first place because he engaged in exactly the same abuse of listed companies that other godfathers go in for. In the early 1980s, after Tung Chee-hwa took over the family empire, he authorised and maintained hundreds of millions of US dollars of loans from his main listed vehicle, Orient Overseas (Holdings) Ltd (OOHL), to what he called the Tung Private Group, a euphemism for more than 200 private companies he controlled. These loans, which no sane minority investor in OOHL would have wanted to make, were frittered away and otherwise blown on bad investments whose returns – had their been any – would have accrued to the Tung family alone. When OOHL was restructured in late 1986, the public company wrote off US$156 million of the loans it had made to the Tungs’ private businesses. The crop-haired godfather sent a personal note to investors on 10 November that read: ‘In the course of 1985 the OOHL Group’s financial position seriously worsened principally as a consequence of the rapid deterioration in the financial position of the Tung Private Group, with which the OOHL Group is closely associated and from whom substantial amounts were owing.’ Needless to say, there was no apology for the misuse of shareholder funds.63
The Art of the Kill
Tung-the-son is in fact not clever enough to skewer and execute minority investors with true godfather aplomb – as if they were bulls to ritual slaughter in a Spanish ring. The real matadors can abuse other investors in a public company a hundred ways before they even notice and then, with a poker face, proceed to the perfect denouement – an offer to take a lacerated public business back into private hands for a fraction of the value of its assets. When the game is played properly there are no bail-outs or embarrassing, forced restructurings. It is an art form in which the godfather is always in charge. Robert Kuok, whose listed businesses have a long track record of underper-forming the broad indices of the markets in which they are traded, is a master. For many years he had a Singapore-listed dry bulk shipping company called Pacific Carriers Ltd (PCL), whose price and dividend performance were so appalling that the counter became known to traders as Please Cut Losses.64 In 2001 Kuok took PCL private at a hefty discount to its net asset value (NAV – or the book value of the company’s assets). Hardly had the wounds of minority investors in the Singapore market healed when the tycoon announced, in October 2003, that he was launching an IPO of a PCL subsidiary, Malaysian Bulk Carriers (MBC), up the road on the Kuala Lumpur exchange. Kuok had already sold 30 per cent of MBC to the Malaysian government at a healthy price and his local investment bank, run by the deputy premier’s brother65, ensured the IPO was an aggressively valued success. Kuok then sought to relieve long-suffering investors in his Hong Kong property arm, Kerry Properties, with an April 2003 privatisation offer at a discount of 53 per cent to net asset value. He bawled out his chief financial officer when minority investors failed to bite. In recent years Lee Shau-kee has attempted three privatisations at discounts of around 40 per cent to NAV; Y. K. Pao’s son-in-law Peter Woo made an offer for a listed retail subsidiary that one analyst estimated to be a 100 per cent discount to NAV – and, after a modest increase in the offer, succeeded; Cheng Yu-tung sought to buy back his New World TMT for a few cents on the dollar; and K. S. Li’s son Richard made a brilliantly devious attempt to privatise his Sunday mobile phone business on the cheap.66 As Peter Churchouse, former managing director of Morgan Stanley in Asia, says of these businessmen: ‘They make investment bankers look like school boys.’67
Of course, a listed business has to be weakened before it can be bought back cheap. Peter Woo’s Lane Crawford department store, held in his listed vehicle pyramid through apex company Wheelock, posted US$72 million in losses in the five years prior to its 1999 privatisation; the firm did not even deliver earnings in the boom that surrounded Hong Kong’s 1997 reversion to Chinese rule, allowing it to be bought back for no more than the value of its own stock portfolio and real estate. The Wheelock web of companies, in fact, was used as a case study of investor-unfriendly practices by the World Bank-funded researchers at the Chinese University of Hong Kong (CUHK). They showed how smaller businesses at the base of Wheelock’s ownership pyramid are used to provide cash to their corporate owners and to take on disproportionate risk in joint investment projects.
A quintessential example of a south-east Asian listed company project occurred in 1997 when Wheelock, its first-tier listed subsidiary Wharf, two second-tier listed subsidiaries, New Asia and Harbour Centre, and a third-tier subsidiary, Realty Development, each took a 20 per cent interest in a real estate development above a public rail station called MTRC Kowloon Station Package Two. The researchers showed how funding for the project came from Wheelock’s subsidiaries and that in many cases the loans were interest-free. Wheelock itself was the only net borrower in the inter-company joint venture; with cheap financing and minimal risk but an equal share in any upside, the company closest to Peter Woo could hardly lose. In 1999, the three least-owned subsidiaries in the Wheelock pyramid were lending the equivalent of between 60 per cent and 160 per cent of their market capitalisations to the joint venture project. The CUHK professor of finance Larry Lang described them as ‘automated teller machines’ controlled by Wheelock. At the same time, because the real estate development was a joint venture, it was not subject to normal reporting requirements. Hong Kong listing rules apply only to listed companies and their subsidiaries; everything else – which is a lot – is off the radar screen. It should come as no surprise that the stock market performance of New Asia, Harbour Centre and Realty Development has been lousy. In February 2003 Peter Woo privatised Realty Development back into New Asia at an unusually generous 19 per cent discount to NAV.
The listed company joint venture scam is an old Asian favourite, particularly in Hong Kong. The reason that K. S. Li’s Cheung Kong mothership owns 49.9 per cent of Hutchison and not more is that this means joint ventures between the two businesses, which are many and large, are not subject to regular reporting requirements. Management contracts, supply deals and other asset trades do not face transparent scrutiny. The true debt, asset and liability positions of joint ventures cannot be reviewed by outsiders. A vast K. S. Li project that demonstrated this occurred in the early 1990s when Hutchison subsidiary Hongkong Electric vacated its old power station and oil depot at Ap Lei Chau, on the south side of Hong Kong island. The best way for Hongkong Electric to maximise the value of its vast site, connected by a bridge to a prime residential area, would have been to tender it for development among different property developers. Instead, Hongkong Electric was pulled into the inevitable joint venture with Cheung Kong and Hutchison. Together they put up thirty-four towers and two shopping malls without ever having to provide Hongkong Electric shareholders with detailed accounts of the project’s costs and management. One can only guess what average returns in the Hong Kong stock market – which have been far better than elsewhere in south-east Asia – would have been if minority shareholder interests were treated on a par with those of the tycoons.
This does not happen, and what investors see again and again is that really good deals go to godfathers’ private companies, while outsiders are left with the rest. Or as Li Ka-shing’s former manager Simon Murray puts it: ‘Would anybody put crap in their own company when they can sell it to the public?’68 The difference is captured by the unbelievable rubbish – senseless new media projects, infrastructure dog-ends, mainland China mistakes – to be found in the listed businesses of New World group’s Cheng Yu-tung versus the cash-generating beasts he owns privately. The best known of the latter is his long-time interest in Stanley Ho and Henry Fok’s Macau gambling franchise. A typical recent addition came in 2001 when Cheng and tycoon pals the Lau brothers saw an opportunity to acquire Japanese department store Sogo’s Hong Kong operation. It was a good business with a great location, but carried a lot of debt and was mired in Hong Kong’s worst retail recession in a decade. Cheng and the Laus used their private companies to buy Sogo, pay off part of its debts and secure cheaper bank funding. At the time of acquisition, the rental yield on the Sogo building was already a healthy 9-10 per cent, but Cheng’s and the Laus’ listed businesses did not get a sniff of the deal. The new owners undertook some ruthless cost cutting and then, as the mainland Chinese economy heated up in 2003, announced a second Sogo project above the new subway on Shanghai’s key retail thoroughfare, Nanjing Road. In April 2004, the Sogo stores were listed in a Hong Kong initial public offering and Chow Tai Fook, the private Cook islands-registered company that Cheng Yu-tung inherited from his wife’s family, booked an enormous profit. At that point shares in Cheng’s listed flagship, New World Development, were worth less than they were in 1986. The late Gary Coull, co-founder of Credit Lyonnais Securities Asia (CLSA), was close to Cheng, helped him list companies and served on the board of New World Infrastructure and New World TMT.69 In the end the stockbroker admitted: ‘He [Cheng] made a lot more money in private companies … Investors who have invested in New World at the macro level have been pummelled.’70
Since the first significant foreign money arrived in south-east Asia’s capital markets in 1993, that has been a pretty good rule of thumb for investments in godfather businesses. Once again, however, it must be stressed that this is not a racial point about investing in ethnic Chinese tycoons. The point transcends race. When Sri Lankan Tamil Ananda Krishnan bought the valuable Chinese movie back catalogue of Celestial Films, he did exactly what Robert Kuok would have done. He purchased it with a private company and then sold it at what one of his investment bankers calls ‘a fat profit’ to his listed media business, Astro.71 If one seeks the worst record of corporate governance in the region over the past thirty years, a serious contender has to be Jardine, Matheson, the original white godfather business. On a fully adjusted basis, shares in Jardine Matheson Holdings (JMH), the apex company in the group, were worth more in 1973 than they were in 2003. The Keswick family, who claim to be descended from William Jardine’s niece, have treated minority investors in a manner that would make many godfathers blush. In the mid 1980s they created a corporate cross-holding structure within their listed company web that allows the family to run the group despite owning less than 7 per cent of JMH. At the same time they were pioneers in buying back stock on the cheap from subsidiaries they had run into the ground. The cross-holdings themselves were made possible by reincorporation and relisting in Bermuda, where the government of the British-controlled tax haven was pre-vailed on to write takeover laws that applied only to five Jardine companies and which help the Keswicks hold on to their inheritance. None of this, of course, did anything for minority investors, who may be forgiven when they refer to Jardine’s Hong Kong headquarters, with its distinctive little round windows, as the Tower of a Thousand Arseholes.72
Bank, Banks, then Markets
In the aggregate, despite the pyrotechnics of the capital markets, south-east Asia’s banks have been much more important to the godfathers’ access to capital story. With such a high proportion of the region’s savings mediated by banking systems, this is macroeconomic inevitability. The relationships between Hongkong Bank and Y. K. Pao and K. S. Li, Bangkok Bank and a who’s who of Thai, Malaysian and Indonesian godfathers, Filipino and Indonesian banks and the kleptocrat tycoons that those island chains have spawned, and so on, are the underlying plot. As a rule of thumb, the greater the control that godfathers have exercised over banks, the greater has been the collateral damage they have inflicted on their fellow citizens. Widely held Hongkong Bank, for all that can be said against its long-term quasi-monopoly position, has never come close to a crisis; it is also one of the few listed businesses in south-east Asia to have given stockholders the kind of long-term returns that textbooks suggest they should expect in emerging economies. The systematic plunder of banks in the Philippines and Indonesia, on the other hand, has not only fleeced minority investors, it has crippled entire economies.
Stock markets came later than banks, and played a lesser role. Despite popular perceptions to the contrary, less than 15 per cent of adults in most south-east Asian territories own shares directly, even today; the proportion in Hong Kong, the leading share owning society, is 28 per cent.73 None the less, the rather shocking returns in south-east Asian markets since the early 1990s – blame excess savings if you are a macroeconomist, blame the godfathers if you think individuals determine life’s outcomes – do have a secondary impact. This is because Asia, and particularly south-east Asia, are the global capitals of forced public saving. Malaysia, Singapore and the Philippines have mandatory provident funds that date from the colonial era74. Indonesia started a mandatory pension fund for company employees in the 1970s, and Hong Kong added its Mandatory Provident Fund in December 2000. Thailand plans such a fund. As more forced Asian saving is directed into regional stock markets it will, unless the trend of low long-term returns changes, make ordinary people more exposed to the markets’ poor performance.
This subject, however, is a tricky one to assess for two reasons. The first is that south-east Asians are already habituated to poor returns on forced savings. By the calculations of one academic, in Singapore in the period 1987–97, when the Central Provident Fund was overwhelmingly invested in government bonds, the annual return was close to zero.75 The second issue is that south-east Asian governments are so secretive about what happens to forced savings that it is impossible to identify any trends with certainty. Singapore’s Government Investment Corporation (GIC), which is one of the ultimate investors of Central Provident Fund balances, only revealed the composition of its board of directors in 2001. Harry Lee Kuan Yew, who chairs the board, claimed in 2006 that the average annual real return over twenty-five years at the GIC had been a healthy 5.3 per cent. Other information revealed at the time suggests the gains are a function of the fact that the GIC invested three-quarters of its money in the United States, Europe and Japan; Singaporeans must hope this asset allocation is maintained.76 Both the International Monetary Fund and credit rating agencies like Standard & Poor’s continue to criticise Singapore’s unwillingness to provide detailed information on its management of public money. In Malaysia, the allocation and management of forced savings is still more of a black box, with critics alleging that short-term payouts from the Employees Provident Fund (EPF) have only been maintained by raiding its capital base and using transfers from other public sources, such as the Malaysian government’s investment vehicle, Permodalan Nasional Berhad. The only sure thing is that, as elsewhere in the region, there is no reliable set of accounts available to the public.
‘When a man tells you that he got rich through hard work, ask him: “Whose?”’
Don Marquis
How hard does a godfather work? This is an intriguing question. Received opinion is that they work hours that mere mortals would be incapable of. Tung Chee-hwa, the shipping magnate’s son who became Hong Kong’s first chief executive, frequently made public reference to his marathon shifts, eventually claiming that the effect on his health of a lifetime of 16–18-hour working days forced his resignation from the top government post. Tycoons from Y. K. Pao to Li Ka-shing have been defined by their pre-dawn waking hours and contempt for the notion of ‘holidays’.
There is no doubt that godfathers put in the hours. But the nature of their working day is not that of a regular executive. As the chief financial officer to a Singaporean tycoon, and former executive of a major Indonesian family, reflects: ‘Do they work hard? They work their relationships …’1 This is an important distinction. In Western management terms, godfathers are commonly perceived as chief executives. But in reality their activities are more like those of supercharged chairmen: setting strategy, deal making, hobnobbing, but ultimately leaving others to execute the substance as well as the detail of what they put in train. An operating environment in which guanxi, political favour and licences are relatively more important than the inherent efficiency and global competitiveness of a business make this inevitable. Godfathers, and their immediate support staff, spend inordinate amounts of time making sure photographs of the tycoons with ascendant politicians are on display in their offices (and that images of out-of-favour politicians are taken down), organising golf games, putting tycoon homes, yachts and hotels at the disposal of persons who need to be ingratiated, resolving the problems of politicians’ wayward children and sending gifts around the world.
Golf is the base ingredient of this social–business mix. Almost without exception, godfathers play the game. In Hong Kong, for instance, the top tycoon rank – K. S. Li, Robert Kuok, the Kwok brothers, Lee Shau-kee, Cheng Yu-tung – are all long-time players and several of them own their own courses (over the border in mainland China) at which to host their guests in private. Asian dictators, too, have been big golf aficionados. Suharto played weekly, while Marcos claimed to have the lowest handicap of any world leader (his bodyguards stand accused of kicking his mis-hit shots out of the rough; playing partners said he never had a bad lie).2 Golf, more than any other activity, is the social lubricant of Asian big business. As a result, golf is part of work. As is attending weddings and funerals of business associates and politicians – what Hong Kongers dub ‘doing red and white’: red being the colour of Chinese weddings, white that of funerals. As is conducting business while eating; godfathers are rarely seen at home for meals. And as is throwing endless parties and receptions.
The average godfather day is consequently long but social. On a typical day in the life of Li Ka-shing, Asia’s richest tycoon, Li will be up before 6 a.m. and off down the hill from his home on Deep Water Bay Road, on the south side of Hong Kong island, to the nine-hole golf course next to the bay in time for a tee-off before 7 a.m. He might play with one or more of the ghetto of other billionaires who have homes close to the Hong Kong Golf Club, with one of his senior executives, or with a new business contact he wants to size up. Li arrives at the office at 10 a.m. Since the completion of the 70-storey Cheung Kong Centre that dominates the eastern side of the Central business district, this is located at the top of the chrome and glass tower, replete with a swimming pool whose roof retracts.3 Li’s first job is to check the press for anything that relates to himself or his companies. He speaks English, but prefers to read Chinese, so relevant parts of the English language papers are translated before his arrival. Li also pays close attention to what brokerage reports say about his companies. Those who provoke his ire can expect a call from one of Li’s lieutenants or a letter from his lawyers; as mentioned previously, Li has frequently had his companies withhold advertising from newspapers that upset him. When papers and correspondence are in hand, Li might pick up the phone and speak with or summon one or more senior managers. The phone system alerts them that it is the Big Boss calling. At 11.30 a.m. Li is ready for a massage. Thereafter, there is time for further administrative tasks before a 1p.m. lunch, inevitably of the working variety. After lunch, Li puts in another couple of hours at the office before heading home at 4 p.m. At 5 p.m. he will likely take another massage and then, perhaps, a game of cards with business associates at 6.30 p.m. Finally, a business dinner before he retires at 10 p.m. and the cycle begins again.4
Since everything counts as work, Li and other godfathers can claim to put in sixteen hours a day. But the task of actually running their businesses, and putting deals cut over golf or lunch into practice, falls to managers. There are many of these, but in most tycoon businesses there is a clearly identifiable person who might be called ‘the chief slave’. This is the first person who gets called when the godfather wants something done. In Li’s case it is Canning Fok, the somewhat overweight executive with a greying, pudding-bowl hair cut who can occasionally be seen in public handing Li a mobile telephone with both hands – the ingratiating Asian gesture normally reserved for name cards. Fok undertakes tasks great and small. On the one hand he has overseen the investment of more than US$20 billion in Li’s third-generation mobile telephony business. On the other, it can fall to him to bawl out equity analysts who have put a sell call on a Li company. Paul Mackenzie, a long-time analyst at brokerage CLSA who has had the Fok treatment, marvels that Fok can find the time. ‘You’d think Canning Fok had better things to do,’ he says.5 The job of the chief slave, however, is to follow the boss’s whim and act as his enforcer. Canning Fok is particularly prone to bullying. One Hong Kong source recalls listening to Fok talk about a business deal over lunch, before Li’s man said of the counter-party: ‘They are going to play ball on this and if they don’t we will crush them.’ It really was, the person says, ‘like a scene from The Godfather’.6
The chief slave is the one who puts in the hard hours. They are well-remunerated – Canning Fok may be the best-paid executive outside the United States, earning around US$15 million a year – but they do nothing but serve and obey their master, every day. Fok is rarely in bed before 2 a.m. and back in the office hours before Li. The chief slave of Lee Shau-kee, K. S. Li’s closest rival in wealth in Hong Kong, is Henderson Land vice-chairman Colin Lam. Lam owns, by Hong Kong standards, an enormous house in the territory’s Repulse Bay. But he almost never gets to live there because he spends most nights in a flat he owns on May Road on the other side of Hong Kong island. The reason he does this is to be closer to his boss, who might summon him at any moment. Indeed, serious physical impairment through overwork is a common hazard of the chief slave position. Malaysian tycoon Ananda Krishnan’s über-lackey, ethnic Indian Ralph Marshall, soldiers on despite major heart surgery in recent years. An investment banker who knows Krishnan describes his treatment of Marshall as that of ‘serial bully’. As a typical example, the source recalls Krishnan in Europe deciding to telephone Marshall over the most trivial matter. On being reminded that it was 3 a.m. in Kuala Lumpur, Krishnan responded that this was unimportant and made the call to the sleeping aide.7 When Marshall himself tells the author, ‘I’m just an office boy’, he is only half joking.8 Robert Kuok’s chief slave Richard Liu, who was on occasion reduced to tears by the stress of his work, dropped dead at Kuala Lumpur International Airport on Chinese New Year’s day 2002. Liu’s death forced Kuok back into day-to-day management.
Those closely acquainted with chief slave characters say it is not just their salaries, but the sense of power and proximity to the godfather that motivates them. The frisson of power is that much greater than in an impersonal multinational business, particularly since the tycoons’ position is more directly bound up with their political access and favour. Ultimately, however, the chief slave’s status is a mirage. He may receive share options but control of the business will never pass to him; rather it will go to the next generation of the tycoon’s family. In this sense he suffers the whim of a capricious employer for nothing.
The Outsiders’ Outsiders
The chief slave is, almost by definition, Asian. He is from the same ethnic group as the tycoon, able to speak the same languages and interact fully with the family. Another stock character in the modern godfather management cadre stands in stark contrast. This is the ethnic outsider, often a European or an American. There is a certain historical symmetry in the retention of such people. In the colonial era, Western banks and trading houses depended on compradors to intermediate business with the local population. It was an enormously profitable position, pregnant with possibilities for bribes as well as legitimate commissions. Stanley Ho’s great uncle, Sir Robert Ho Tung, was the greatest comprador of them all (for Jardine, Matheson) and the first Chinese allowed to live on Hong Kong’s Peak. Sir David Li’s maternal grandfather was a comprador for Swire. The contemporary godfather is nothing like so dependent on outsiders as the colonials were on their compradors – he is far more cosmopolitan, often having studied abroad and typically speaking English – yet the outsider is still an important component of big business success in south-east Asia. He may be required for some specialist, technical ability or to overcome the political problems that go with family business.
In the late nineteenth century, tycoons like Indonesia’s Oei Tiong Ham were already employing European engineers to help them run imported machinery. But in the post-independence era, the godfathers’ needs became more complex. Suddenly they were the ones in league with political power, holding exclusive licences and in a position to buy out or muscle out old colonial commercial interests. As their power grew, they needed to know about global markets and global capital. In this context the stage was set for the rise of what might be called the gweilo running dog (gweilo, from the Cantonese meaning ‘ghost man’, is a common euphemism in the region for a foreigner; running dog comes from the Mandarin Chinese zou gou, meaning a servile follower). Some of the godfathers’ running dogs brought nothing more than their professional management ability; others were, and are, less wholesome characters ready to engage in all manner of unseemly activities. Rodney Ward, the seasoned head of Swiss investment bank UBS in Asia, suggests that with respect to unprincipled business in the post-independence era: ‘The gweilos led the way not only in terms of degree of avarice but also in denying it had anything to do with them.’9
One of the earliest gweilo running dogs was Charles Letts, a buccaneering British expatriate who had fought alongside a communist group in the Spanish civil war and later with Thai communists during the Second World War. A Thai speaker, he was captured by the Japanese and imprisoned. After the war, he took a job with Jardine, Matheson based in Singapore and Malaysia. But in the independence era Letts was increasingly frustrated that the British hong, and its aloof taipan family the Keswicks, would not adjust to the new business environment; he suggested bringing the rising stars of the local business scene on to the board but was quickly rebuffed. Letts was friends with emerging south-east Asian tycoons like Robert Kuok and Kwek Leng Beng. In the 1960s he became one of the first expatriate deal makers to cross the racial rubicon. He teamed up with Lee Loy Seng, son of a successful Malayan-Chinese tin miner, who was moving into the plantation business. After Malaysian independence in 1957, British companies began to sell off agricultural estates, a process much expedited by the arrival of the New Economic Policy (NEP) in 1970. Although designed to further the economic interests of ethnic Malays, the NEP was in fact more readily directed against the commercial interests of the former colonial power. Letts and Lee Loy Seng made an effective partnership, with Lee indentifying businesses and land he wished to acquire and Letts travelling to London to negotiate terms. Lee Loy Seng became the biggest private plantation owner in Malaysia, concentrating on rubber and, later, palm oil. Letts, not surprisingly, became a suspect character among the expatriate establishment. Now in his late eighties, he still goes to his Singapore office each day and serves on the board of the private Lee family holding company.
As the imperial order crumbled, then, it was only natural that southeast Asia’s ascendant godfathers would find foreign talent at their disposal. Among advisers and key personnel whom Robert Kuok picked up were Jacob Ballas, an Iraqi Jew who became chairman of the Singapore stock exchange, Paul Bush, a senior British accountant with Coopers and Lybrand (now Price-waterhouseCoopers) in Malaysia, and Piet Yap, a westernised Sumatran Chinese who had worked for big Dutch trading companies in colonial Indonesia and became a key manager of Kuok’s burgeoning interests in the country. The only limit to the advantage that could be gained from hiring from a multiethnic talent pool was a tycoon’s capacity to trust outsiders. In most cases this proved a constraint. Family-based businesses were naturally suspicious of outsiders, and particularly gweilos. After all, the average tycoon had a lot of secrets that needed keeping. But one godfather, more than all others, realised that a well-paid gweilo was just as trustworthy as an Asian. That tycoon was Li Ka-shing, who became the ultimate employer of the gweilo running dog. As Simon Murray, who ran Hutchison for Li for a decade, observes: ‘K. S. is totally non-racist. He looks at people and sees the value.’10
Quite a Kennel
Li began to forge critical alliances with British expatriates in the 1970s. After he took control of the formerly British hong Hutchison in 1979, he recruited senior European and North American managers to his staff. Y. K. Pao, Li’s forerunner as Hong Kong’s pre-eminent tycoon, had what Murray calls ‘invisible gweilos’, but Li took internationalisation to a new level. While he himself operated his original real estate business, Cheung Kong, ‘Hutchison was run, over there, as “gweilo country”’, says Murray.11 The gweilos were a mix of the unctuous, the greedy and the professional – but they were all useful.
One of Li’s earliest and most enduring relationships was with Philip Tose, a man whose name is now synonymous with the collapse of the Peregrine group, until 1998 the largest Asian investment bank and brokerage outside Japan. It went down with around US$4 billion of liabilities and Tose was barred from holding company directorships in Hong Kong for four years for governance failures that contributed to Peregrine’s downfall. He had arrived in Hong Kong in 1972, sent out by his stockbroker father to get rid of expensive British expatriates and localize the staff of Vickers da Costa, then one of the largest British-owned brokers. At a time when the local broking industry was in its infancy, he wrote what he claims was the first report on a Hong Kong Chinese company by an international brokerage.12 The business in question was Li Ka-shing’s Cheung Kong. Tose subsequently told Peregrine staffers that, prior to public distribution, he sent a copy of the report to Cheung Kong. When a Li minion telephoned to point out a minor error, Tose had the entire report reprinted.13 It was the beginning of a three-decade-long working relationship with K. S. Li, whom Tose has described publicly as ‘a very close personal friend’.14 When Tose set up Peregrine in 1988, Li was one of his investors.
Tose’s stockbroking persona was that of Hong Kong’s, and Asia’s, raging bull. Prominent on the social circuit, he was a sucker for tycoons. In the early 1980s he enthused about the fraud-based business empire of George Tan, publishing a gushing special review of his Carrian group in November 1981 and affirming a new buy recommendation from Vickers shortly before Carrian went under in the biggest corruption scandal in Hong Kong corporate history.15
There were periodic allegations that Tose’s relationships with tycoons were closer than appropriate. In 1982 Hong Kong’s first insider trading tribunal revealed Tose instructed his dealers to buy as many Hutchison shares as possible in the twenty-four hours before Li Ka-shing announced his takeover of the company; a portion of the shares was for Tose’s personal family accounts. He denied trading on insider information and, supported by Li’s testimony, was exonerated. In early 1991, former Peregrine analysts say Tose intervened to stop a ‘sell’ recommendation being put out on Hutchison in a research report. ‘Philip Tose came down to the research department and rewrote it himself,’ says a former staffer.16 There is no allegation that the change in the report was linked to an investment banking deal, but it is indicative of the way Tose worked. He declines to discuss the incident.17
In early 1996 the Hong Kong bourse was filled with rumours of market manipulation when Peregrine did put out a sell call on Hutchison. The share price dropped around 13 per cent and K. S. Li stepped in to buy up large volumes of his own stock.18 Might Peregrine have helped Li acquire his own stock cheaply? Until Peregrine imploded in 1998, Hong Kong’s notoriously hands-off Securities and Futures Commission had little to say about the firm. Peregrine was censured once, in 1993, for farming out trading orders to other brokerages in a manner that made stocks it had taken to market appear more actively traded than they were.
The end of Peregrine was like the end of any un-hedged bull-market operator. The firm could not survive an economic downturn. As the Asian financial crisis unravelled in late 1997, Peregrine was caught with three-quarters of its capital lent out to just two of the more scrofulous companies in Indonesia – a Jakarta taxi firm called Steady Safe that was linked to the Suharto family and Asia Pulp & Paper, the vehicle of godfather Eka Tjipta Widjaya and the region’s biggest delinquent debtor. The money did not come back, Peregrine could not meet its obligations, and so folded, in January 1998. Li Ka-shing did not open his wallet to save Peregrine, but he did show his trademark loyalty to a trusted lieutenant. Despite all the negative publicity surrounding the Peregrine debacle and Tose’s court-sanctioned ban from running a business, he was put on the Li payroll as an adviser to Hutchison. There he remains, squirreled away on the top-most floor of Hutchison House in Hong Kong’s Central, and surrounded by paintings of his youthful incarnation as a 1960s Formula 3 racing driver. A crash which left him in hospital for four months put paid to that career. Christopher Wood, the well-known Asian equity strategist who started as an analyst at Peregrine, observes of Tose’s life: ‘He doesn’t know how to go round corners.’19
Another early gweilo recruit to the K. S. Li circle was Alan Johnson-Hill, who worked for him as his ‘general assistant’ in the late 1970s. Johnson-Hill was a former executive at Jim Slater’s Slater Walker Securities, which went on an acquisition spree in Asia in the early 1970s that included Haw Par, the business founded by Singaporean tycoon Aw Boon Haw. Slater Walker was another aggressive investment firm that went bust, involving an investigation by the Singapore government. Much of this focused on Spydar Securities, whose shareholders were senior Haw Par executives (of whom Alan Johnson-Hill was one), set up to make parallel trades on Haw Par acquisitions, and other deals, for their personal benefit. One Haw Par manager, Richard Tarling, was sentenced to prison in Singapore in November 1979. Johnson-Hill was among those who were not charged. However, suspicion of securities malfeasance did not leave him. Working for K. S. Li, he was also named by Hong Kong’s first insider trading tribunal as a purchaser of Hutchison stock – 170,000 shares – immediately before the tycoon announced his acquisition of a controlling share in the company. Johnson-Hill said he made the purchase several hours before Li told him about the deal. By the time the tribunal – to which he provided written statements but at which he did not offer himself for cross-examination – decided he had no case to answer, Johnson-Hill had returned to Europe, where he bought a vineyard in France. Hong Kong wags refer to its output as Château Cheung Kong.
The Haw Par connection continued with K. S. Li’s recruitment of George Magnus, a British manager hired to run Haw Par in Singapore after the government began its criminal investigation. Haw Par had purchased a 20 per cent interest in K. S. Li’s Cheung Kong as an investment, a stake that made Li’s company a takeover target if it fell into the wrong hands.20 A couple of weeks after Magnus resigned as Haw Par chief executive in 1978, it was announced the Cheung Kong stake had been sold to Li. Magnus subsequently resurfaced as an executive director of Cheung Kong, going on to become deputy chairman, as well as a director of other Li companies. He was with Li for more than twenty-five years before retiring to an island off Vancouver; he remains a non-executive director of Cheung Kong. In 1986 Li, Magnus and other Cheung Kong directors were found to be ‘involved in culpable insider dealing’ in Hong Kong’s second insider trading tribunal.21 The guilty verdict concerned trading in shares in International City Holdings, a Li company, and led merely to a symbolic censure, since insider trading was not made a criminal offence in Hong Kong until after the Asian financial crisis in 1997.
In 1984, Li hired Simon Murray, a former Jardine, Matheson manager who had set up his own trading business, to be Hutchison’s chief executive. Murray, well liked and respected in Hong Kong business circles, was seen by some observers as an example of another use to which a gweilo might be put. K. S. Li had recently steamrollered Hutchison’s board into paying out a special US$256-million dividend, the biggest chunk of which went to Li’s Cheung Kong, which was severely cash-strapped by the early 1980s real-estate crash.22 The payout occurred despite a public promise from Li’s previous chief executive at Hutchison that the company would not be used as a cash dispenser. It was also the time when Li was coming under suspicion for insider trading with respect to International City Holdings. In this context, Murray brought much-needed credibility that the interests of minority shareholders at Hutchison would be defended.23 He went on to run the company until 1993, when a number of differences – over everything from strategy to political views about Hong Kong’s future – led to his departure. Li, true to form, was careful to ensure the split with Murray involved a gentle let-down. He kept him on the board at Hutchison and Cheung Kong, and backed Murray to start his own private equity business. In similar vein, Li’s Hutchison had paid out nearly US$3 million in 1984 – a considerable sum in those days – to the three senior executives who were pushed out after the special dividend; they had not been happy with Li’s behaviour, but left quietly.24
As Li’s businesses expanded, more of the foreigners he brought in were employed for narrower professional tasks. Today, two Britons run, respectively, his ports and retail businesses. A Canadian holds the key role of chief financial officer at Hutchison. Whatever the gweilos do, Li’s use of them is unmatched among other tycoons. He is the ultimate embodiment of the godfather as cosmopolitan manipulator. His self-taught English is not perfectly fluent, but it is more than adequate for communicating with his gweilo lieutenants. Yet Li never uses English at shareholders’ meetings or on the rare occasions when the press pack surrounds him. At those times his identity is thoroughly Cantonese (albeit with a distinct Chiu Chow accent). The local press in Hong Kong lionised him for three decades – dubbing Li chui yan, or ‘Superman’, for taking on and beating colonial big business. Li made time for favoured Cantonese reporters. The foreign and English-language press, which showed less reverence, has rarely gained access to him. More usually, it has been the recipient of threatening letters from his lawyers. Three months before Li was among the first group of people to be named insider traders in Hong Kong in March 1986, he had secured damages, under threat of litigation, from the South China Morning Post for alleging he was exactly that.
K. S. Li is the great puppet master – though Robert Kuok is more adept at blending in to different élite cultures around the region. Li is the outstanding gweilo handler. Whether obtaining dispensations from the colonial Hong Kong government or managing a critical relationship with the Hongkong Bank (see chapter 5), and whether recruiting an amoral running dog or hiring a technical specialist, Li has done so without any apparent racial hang-ups. This is not the norm in a region where a history of colonial racial prejudice and notions of Chinese exceptionalism create all manner of ethnic neuroses. As Chris Patten, the last governor of Hong Kong, observes: ‘He didn’t allow the advantages, which were stacked up in favour of the hongs, to make him bitter.’ Li simply concentrated on what, in the long run, would make him the winner. Patten adds: ‘He’s one of the few businessmen I’ve met who is clearly a sort of genius.’25
But Why Modernise?
Li’s people-handling skills have helped make him, by most estimates, the richest godfather. While some peers keep nothing more than a token company gweilo, almost as a racial reminder of who is in charge (one such lone running dog in Hong Kong, employed by a major regional family, is sufficiently underemployed to maintain an entertaining daily blog of his activities),26 Li has dotted his empire with executives recruited from international business. However, the role that monopoly and cartels play in creating all godfather wealth must not be forgotten. In Hong Kong, some investment bankers speculate that the other two leading beneficiaries of local land policy and the real estate cartel – Lee Shau-kee of Henderson and the Kwok family of Sun Hung Kai – might be just as wealthy, if not more so, than Li if all their assets could be counted. No one disputes that there is not much net worth difference between the three. This is despite the fact that Lee and the Kwoks have done nothing more with most of their earnings than recycle them into passive investments, often overseas. For all Li Ka-shing’s perspiration in trying to build a global conglomerate with a global workforce, those who have remained focused on milking one unfree market are almost as well off.
In general, the godfathers have little to contribute to the corporate science of human resource management. They pay their chief slaves and gweilo running dogs well, because such people come from a globally traded management cadre. But the bulk of the personnel in their sprawling organisations is little more than corporate cannon fodder, with wages additionally constrained by south-east Asia’s long-time suppression of union activity and importation of cheaper foreign labour when big business demands it (Indonesians to Singapore, mainland Chinese to Hong Kong, and so on). Godfather businesses are about obtaining a share of a monopoly and then cutting costs, rather than hiring the best people in order to make a challenge in a free market. Compared with multinational companies, management systems are relatively few and relatively arcane. What matters is the will of the Big Boss. At the heart of every tycoon business is a battery of secretaries, a chief slave and a phalanx of nervous executives awaiting the next instruction of one unpredictable individual.
How to be a Godfather, #4: Banks, piggy banks and the joy of capital markets
‘I believe that banking institutions are more dangerous to our liberties than standing armies.’
Thomas Jefferson, letter to the US Secretary of the Treasury, 1802
There is, in addition to oligopolistic licences and concessions, a second resource which the south-east Asian godfather cannot do without: access to capital. In the post-colonial era, capital became readily available for the first time to local entrepreneurs because of three developments. The first was changes in the lending practices of existing banks. The second was the obtaining by well-connected tycoons of licences to open their own banks, which typically became akin to personal piggy banks, albeit ones filled with other people’s money. The third development was the growth of the region’s capital markets.
Few things constrained local businessmen so much under colonial rule as the difficulty of obtaining loans at reasonable interest. European and American banks were little concerned with lending to Asian businesses – their preferred activity was financing international trade with letters of credit and other support – and when they did lend to locals their compradors were rapacious in demanding kickbacks. There was a number of small ethnic Chinese-and Thai-controlled banks in the region, but they were extremely conservative in their lending practices. Most local businessmen turned to the traditional Indian moneylenders with their punishing rates of interest. Starting in the 1950s, however, more aggressive, entrepreneurial management at two Asia-based banks began to change this situation. The banks in question were Bangkok Bank, headquartered in Thailand, and the Hongkong and Shanghai Bank, based in Hong Kong.
The trail blazer was Bangkok Bank, led by Chin Sophonpanich, son of a Teochiu father and a Thai mother. A skilled trader and wartime black marketeer, Chin was brought in at the end of the Second World War to what was a failing institution set up under the aegis of the Thai royal family; he was employed first as comprador and subsequently as general manager. In the years that followed, Chin built out the most strongly politically-connected business in post-war Thailand, with Bangkok Bank at its centre. After the military coup of 1947, he co-opted the leadership families of Field Marshal Phin Choonhavan and police director-general Phao Siriyanon as shareholders and directors of his companies and restructured the bank to make the government its biggest shareholder. In return, he obtained a large injection of state capital, near-monopolies of gold and foreign exchange trading and the handling of overseas remittances by ethnic Chinese workers, protection from competition and an unrivalled client base. Like all the most successful godfathers, Chin also rose above the dialect differences of the Chinese community, recruiting the cream of Thai–Chinese graduates (pure Thais almost always preferred civil service careers to business) from the élite Thammasat University. One of the most important was Boonchu Rojanasathien, a Hainanese,1 who saved Chin’s bacon after Field Marshal Sarit Thanarat staged a coup in 1957. Chin quickly made Sarit an adviser and appointed his interior minister, Field Marshal Prapass Charusathiara, chairman of Bangkok Bank, but his links to the ousted Phin and Phao made him too nervous to remain personally in Bangkok. He went into exile in Hong Kong until Sarit died in 1963. In his absence, Boonchu ran the bank, backed by the most adeptly chosen management cadre in Thailand. A sense of how effectively the executives straddled the worlds of business and politics is given by the fact that, as of 1980, Bangkok Bank’s board had produced three deputy premiers and two speakers of the Thai parliament.2 But the executives were also entrepreneurial businessmen; they introduced time deposits (long-term saving) and rural credit to Thailand.
Chin Sophonpanich created the largest bank in south-east Asia and one that was extremely profitable. A report by the International Monetary Fund in 1973 claimed that Bangkok Bank’s privileged position allowed it to make returns on its capital in excess of 100 per cent a year (a claim denounced by Chin’s lieutenants).3 What was not in dispute was that the bank’s bulging deposit base could not be lent out at optimum rates in Thailand alone. This is where Chin revolutionised the south-east Asian banking scene. He personally travelled between Hong Kong, Singapore, Kuala Lumpur and Jakarta, identifying and courting the new generation of putative post-colonial tycoons. One multibillionaire remembers looking for money in the late 1950s to fund an import substitution deal for which he had obtained a licence. Having heard about Chin, he offered to come and see him. Chin’s response was that there was no need – he would come to the client. ‘For the Chinese businessmen of south-east Asia there was a major moment with Chin Sophonpanich,’ says the tycoon. ‘He broke what was then the highly conservative, highly colonialistic banking system.’4
Chin banked the key godfathers outside Hong Kong – Robert Kuok in Malaysia, Liem Sioe Liong in Indonesia, the Chearavanonts in Thailand – as well as various other players in Singapore and Hong Kong. In the mid 1970s, two-fifths of his bank’s earnings came from more than a dozen branches outside Thailand. Chin is remembered fondly by the tycoon fraternity. ‘He was absolutely charming – he had about six mistresses,’5 reminisces one billionaire who knew Chin well during his sojourn in Hong Kong. Another calls him ‘a chunk of granite’.6 Chin was also a typically amoral tycoon. He was closely linked to the Thai heroin trade through his role as personal financier to the narcotics kingpin Phao Siriyanon, and to other politicians involved in running the drugs business; his private investments, according to a friend, included quite a few girlie bars.
Tycoons are money machines, and no one sought to pass judgement on Chin. From the early 1980s, however, his star – and that of Bangkok Bank – began to fade. Chin suffered a long illness before his death in 1988, exacerbated by his fondness for alcohol (particularly brandy) as well as women. At the same time he failed to take Bangkok Bank beyond its incarnation as a regional financier of upcoming ethnic Chinese tycoons. In the 1950s and 1960s this was revolutionary, but it was not enough to sustain Bangkok Bank’s ascent. Chin was cosmopolitan enough to be banker to all Chinese, but not sufficiently so to create a truly Asian and then global institution. And when he died, management of Bangkok Bank was dominated by his children rather than the managers he had nurtured. Chin departed this world as another brilliant social chameleon. His assimilation and ‘Thai-ness’ were such that he was cremated in the Thai manner (the Chinese tradition is burial) and the pyre lit by the king himself. Yet, at his peak, he had promised so much more.
Where HSBC Came From …
It was left to a colonial firm to continue the financial revolution. The Hong kong and Shanghai Banking Corporation (HSBC) had given up its core operation in Shanghai and retreated to Hong Kong in 1949, following the communist victory in the Chinese civil war. What locals came to know as the Hongkong Bank financed many Shanghai manufacturers who fled the mainland to restart their businesses in Hong Kong. None the less it remained an inherently colonial institution. Until the 1960s the bank still employed a comprador, who guaranteed the borrowings of local businessmen. The several hundred expatriate managers who ran the business rarely met with Chinese entrepreneurs and did not directly assess their creditworthiness. Expatriates dealt with the banking needs of other expatriates.
Unlike the family-controlled British hongs, however, ownership of the Hong-kong Bank was widely dispersed – no individual was allowed to own more than 1 per cent of the shares – and its managers could rise all the way to the top of the business. It was perhaps this that led key executives of the post-war era to take a closer interest in a new generation of Chinese tycoons as their rising wealth became apparent, and to back them in takeovers of weakened colonial businesses. Racial prejudice went out of the window once it was clear the local godfathers were the key to the bank’s development as Hong Kong’s biggest business. As Leo Goodstadt, head of the Hong Kong government’s Central Policy Unit in the 1990s, wrote: ‘It [the bank] presided over an orderly and highly profitable transfer of economic control from British to Chinese companies.’7 This does not mean the Hongkong Bank was a committed free marketeer. Its relationship to the colonial administration was second to none, and allowed it to defend a uniquely privileged position. Until the mid 1990s, and the setting up of the Hong Kong Monetary Authority, it was a de facto central bank,8 issuing notes, acting as a clearing house, enjoying interest-free use of the banking system’s surpluses, acting as banker to the government and knowing much of what went on in other banks. Protected by a moratorium on bank licences from the mid 1960s to 1978, an interest rate cartel that persisted into the 1990s, and a government-supported takeover of a major local bank, Hang Seng, in 1965, Hongkong Bank built up a roughly 50 per cent share of the Hong Kong deposit base. Its pre-eminence was even greater than that of Chin Sophonpanich’s Bangkok Bank in Thailand and, like Chin, it used its capital to invest in its clients’ businesses as well as lending out its vast deposits. In this way the Hongkong Bank became the kingmaker among the Hong Kong godfathers.
The two dominant Hong Kong tycoons of the post-war era – Y. K. Pao, who died in 1991, and K. S. Li – were both catapulted above the ranks of their peers by the Hongkong Bank. In the first case, it was the bank’s decision to enter into shipping investments with Pao, and to finance them, that allowed him to become the world’s leading private ship owner. Pao was from a prosperous mainland family and had considerable experience in manufacturing, insurance and banking before arriving with his family in Hong Kong in 1949. The Paos managed to bring a good portion of their wealth with them. In the early 1950s, Y. K. Pao built a successful import–export business in the colony – assisted by the Korean War boom – before buying his first cargo ship in 1955. It was this foray into shipping that gradually alerted him to what looked like an unusually good investment proposition. The Japanese government was supporting its shipbuilding industry by issuing export credits – loans – to foreign buyers to cover up to 80 per cent of the cost of vessels at fixed interest for terms around eight years. At the same time the post-war boom meant that Japan’s large trading companies, the sogo shosha, were willing to sign long-term ship charters, typically running for more than a decade, to secure foreign-owned vessels that used cheap foreign crews. Critically, it was possible to get the trading companies’ banks to issue letters of guarantee of the performance of the charterer, making a lease rock solid. When these pieces were put together, they added up to a rather extraordinary deal. Pao could build ships in Japan, pay for most of them with Japanese government money and charter them long-term to Japanese companies whose payments were guaranteed by Japanese banks. At the end of the charter a ship was his, fully written off. As his Austrian son-in-law Helmut Sohmen, who married Pao’s eldest daughter and runs the Bergesen WorldWide shipping group,9 observes: ‘It was a banker’s mind that saw the possibility to exploit a government’s generosity.’10
Pao’s problem was that he did not have a bank. He could put down the 20 per cent he needed to front up on a few ships, but in order to take real advantage of the opportunity he required much more money. Hongkong Bank’s decision to back him was critical. It was driven by Jake Saunders and Guy Sayer, who were both to become chairmen of the bank in subsequent years, and were aware of Y. K. Pao from their work at the bank’s trade finance department. It was far from normal for expatriate managers to deal direct with Chinese businessmen – ‘There was still a colour bar,’ says Sohmen11 – but the fact that Pao taught himself English, had a background in banking and was already rich made a difference. So did the no-lose nature of the Japanese investments. Hongkong Bank went on to finance Y. K. Pao for ship purchases he made individually and became an equal partner in three joint-venture shipping investment companies.12 By 1979 Pao controlled 202 ships totalling more than 20 million deadweight tonnes – the largest fleet in the world, far larger than the Greek Onassis and Niarchos fleets combined. Hongkong Bank profited handsomely from its relationship with Pao. In 1971 it brought him on to the company’s board, and he went on to become bank vice-chairman. Pao was the bank’s first Chinese director, his appointment signalling the beginning of a trend to fill up its board room with rising Chinese tycoons.
It was only when Hongkong Bank assisted Pao’s assaults on other British-controlled businesses, however, that it really rocked the Hong Kong establishment. In the late 1970s Pao sold off a large chunk of his fleet, amassing cash for other investments. One of these was a gradually rising stake in Hong Kong and Kowloon Wharf and Godown Co., a company linked to Jardine, Matheson. When Jardine decided to see off Pao with a takeover bid in 1980, he trumped its offer with credit from Hongkong Bank and was advised by its investment banking unit, Wardley. A few years earlier it would have been unthinkable that a Chinese businessman could take anything away from Jardine. But with Hong-kong Bank’s support, Pao did so. An exemption by the stock exchange from having to make a general offer for Wharf shares he did not own showed Pao was now a real insider. In 1985 he went on to take control of another British hong, Wheelock Marden. Jardine, Matheson – once untouchable – was terrified by Hongkong Bank’s alliances with Chinese tycoons and spent much of the 1980s engaged in costly restructuring exercises to defend against further raids on its interests.
The so-called princely hong was right to be scared, for Hongkong Bank was entering the most aggressive period of its development. In the mid 1970s the bank was using its own capital to be a significant player in Pao’s shipping business, as well as owning a quarter of the Swire hong’s key asset, the airline Cathay Pacific, and a fifth of another, troubled British hong, Hutchison Whampoa. It was in dealing with this last investment that the bank forged a godfather relationship even more important than the Y. K. Pao one.
It happened on the watch of the most flamboyant and controversial of the Hongkong Bank’s post-war chief executives, Michael Sandberg, chairman from 1977 to 1986. A leader with more of a trading and deal-making background than his predecessors, Sandberg was flash by Hongkong Bank’s staid standards and, many said, greedy to boot. He left his physical mark on the bank with the construction of its current Hong Kong headquarters, a no-expenses-spared Norman Foster design that cost four times as much as the nearby, larger Bank of China building. Sandberg was still more lavish in refurbishing his own bank-provided home, Sky High, on Hong Kong’s Peak. At a strategic level, he began the globalisation of Hongkong Bank with the acquisition of Marine Midland in upstate New York in 1980. He also bought two London merchant banks and tried but failed to buy Britain’s Royal Bank of Scotland. But it is for his relationship with Li Ka-shing that Sandberg is remembered in Hong Kong. Sandberg confirmed Li as Y. K. Pao’s successor as chief godfather when he put in his hands, by way of an untendered sale, a controlling stake in Hutchison Whampoa.
The bank owned the stake as a result of a bail-out of Hutchison and its former subsidiary Hongkong and Whampoa Dock Company in the early 1970s. Like Peregrine twenty-five years later, Hutchison foundered on the rocks of risky business in Indonesia, in its case leasing activities. Hongkong Bank refinanced what became Hutchison Whampoa in return for 22 per cent of its equity, putting in an Australian manager, Bill Wyllie, to nurse it back to health. Two years after Sandberg became Hongkong Bank chairman, he decided to sell the revived business. He did so, however, without offering it around to obvious potential purchasers – the two dominant British hongs, Jardine and Swire, or Y. K. Pao, the bank’s existing Chinese tycoon partner. Instead, a deal was struck with Li Ka-shing on terms that appear extremely generous. Bill Wyllie calculated that the HK$639-million price agreed was less than half the net asset value of Hutchison’s constituent businesses, and says he had buyers lined up who would have paid much more. ‘For Li, it was a brilliant deal,’ Wyllie recalled more than two decades later. ‘The breakup value of the company was more than double the amount he paid.’13 Moreover, Li was given a deferred payment option, further reducing the effective price.
An untendered sale at a very low price begs many questions. At a strategic level, however, the decision to sell to Li was no wild punt. By 1979, when the Hutchison deal was done, K. S. Li’s Cheung Kong was already Hong Kong’s number two property company after Jardine’s Hong Kong Land. Thereafter, the prime Hutchison assets guaranteed Li’s ascent to the top of the tycoon pile. He acquired a leading position in the container port cartel, a share in the retailing duopoly in supermarkets and pharmacies with PARKnSHOP and Watsons (the other player was Jardine), and valuable land on Hong Kong island. In short, Li joined the cosy colonial commercial stitch-up that was Hong Kong’s domestic economy. He was already banking with Hongkong Bank, but in the 1980s and 1990s would put vast amounts of business their way. ‘K. S.’s present back was to do all his business through the bank,’ observes a senior Li executive.14 He was made non-executive deputy chairman of Hongkong Bank, succeeding Y. K. Pao, as the trend to fill up non-executive positions on the board with Chinese tycoons accelerated. This sent out the message to other godfathers that the bank was ready to finance them.
Sandberg developed close relationships with other major players, such as New World’s Cheng Yu-tung. Everyone (except the Keswicks at Jardine, Matheson) was happy. Hongkong Bank cemented its position as the totally dominant provider of capital in south-east Asia’s leading financial centre; Chinese tycoons were allowed to fulfil their potential and muscle in on colonial business; and the basic cartel structure of the local economy remained intact. When Sandberg retired in 1986, K. S. Li made clear the closeness of their relationship by giving him, as a leaving gift, a gold reproduction, around a metre high, of the new Hongkong Bank headquarters. A select group of guests at a dinner held at Li’s Hilton hotel was awestruck when the immodest token of affection was revealed.15 One of those present quips that the statue has doubtless since been ‘melted down’ at Sandberg’s English estate.
Playing kingmaker to the new tycoons guaranteed that Hongkong Bank’s pre-eminent position in the city state endured through the post-war era. All the big boys – even someone like Henry Fok, whose links to the Communist Party of China in theory ended his links to the British establishment – had major banking relationships with what was known in Hong Kong simply as ‘the bank’. Of course, the ability to pick winners was not entirely foolproof. Under Sandberg, there was the spectacle of the bank chairman falling for the outstanding con artist of the era, George Tan Soon-gin. Tan was a Singapore bankrupt, born in Malaysia, who arrived in Hong Kong in 1972 and over-stayed his visa by eleven years. With borrowed money, lots of bribes and limitless chutzpah, he fashioned Hong Kong’s ‘hottest’ investment company of the early 1980s, the Carrian Group. Tan’s mode of operation was reflected in an opulent wood-panelled office stuffed with expensive art and thick-pile oriental carpets. He employed a phalanx of gweilo running dog executives that further made him look the godfather part. His biggest line of finance came from the Hong Kong subsidiary of the Malaysian government’s Bank Bumiputra. But Tan’s key local backer was the man he called ‘Uncle Mike’. Sandberg fell for George Tan hook, line and sinker. He entertained him in his box at the Hong Kong races and introduced him to key businessmen in the colony. Hongkong Bank made substantial loans to Tan – Sandberg, questioned by journalists, said publicly the total was less than US$200 million. At least as important, Sandberg’s and the bank’s endorsement of Tan encouraged a roster of European and American banks to back him as well. When Carrian collapsed, amid a falling Hong Kong property market, it had debts of US$1.3 billion – Hong Kong’s biggest ever bankruptcy. The affair was powerful testimony to the power of Hongkong Bank, both direct and indirect, in the allocation of capital in the colony.
Sandberg retired in 1986 to an English peerage and a Hampshire estate, untouched by the criminal investigations surrounding George Tan’s demise.16 Nonetheless, the bank’s reputation ‘suffered a bit towards the end of his sojourn’, concedes a former senior colleague.17 Sandberg’s close relationships with George Tan and the Australian Alan Bond, another would-be Asian tycoon who went to jail, as well as his appetite for business gifts, had begun to embarrass some of his peers.18 ‘He collected funny watches. From time to time people gave him watches,’ recalls the colleague, alluding to Sandberg’s vast horology collection.19 Sandberg sold his set of timepieces at auction in 2001 for just over US$13 million and set tongues wagging once more. Whatever his personal foibles, and whatever the case for selling Hutchison in a nobid deal to Li Ka-shing, however, Sandberg concluded the economic transition in Hong Kong that began when the bank backed Y. K. Pao. Henceforth, two surviving British hongs – Swire and a much-weakened Jardine – would share power in the domestic economy with a group of Chinese tycoons. It was the result of decisions made by the supreme arbiter of capital allocation in Hong Kong, the Hongkong Bank.
Banks that Always Say Yes
Singapore had some echoes of the Hong Kong experience, with four large banks determining most access to capital. The difference was that behind those four banks, directly and indirectly, was one family, the Lees. The government stopped issuing full banking licences in 1973, restricted the business foreign banks could conduct and made local banks apply for permission to enter new product lines and launch takeovers. The biggest of the local banks is state-owned Development Bank of Singapore (DBS). The other major players – Oversea-Chinese Banking Corporation (OCBC) and United Overseas Bank (UOB) (which took over a third large private bank, Overseas Union Bank (OUB) in 2002) – are run by anglicised families whose heads have similar élite backgrounds, and are on cordial terms with, Lee Kuan Yew. The result is that local non-banking godfathers have been, if not beholden to, then extremely conscious of the need to stay on the right side of the Lee family in order to keep their credit lines open. When a family like that of Ng Teng Fong, for instance, is invited to a gathering organised by the Lees, father, son Philip (based in Singapore) and son Robert (based in Hong Kong) will drop whatever they are doing and attend in unison. Lee Kuan Yew well understood the value of controlling Singapore’s purse strings after independence, as well as its political ones.
Elsewhere in the region, the fight for access to capital played out differently. Instead of being hostage to a dominant third-party banking institution, as in Hong Kong, or a banking system under the thumb of a ruling dynasty, as in Singapore, leading tycoons prevailed on their political sponsors to let them run their own banks. This was a recipe for financial disaster, but one which governments none the less signed off on. Part of the reason was the very poor long-term performance of state banks, which always seemed to fall victim to corrupt manipulation. It was a curiosity that policy makers thought godfather banks might be better than widely owned private ones. Of course, the allocation of bank licences was the source of some of the fattest bribes in the region. The pace setter in bank mismanagement was the Philippines.
The studied abuse of the banking system by Filipino tycoons was first practised in the era of rule by the United States. The Americans, who were to some extent accidental colonists following their victory in the Spanish-American war of 1898, devolved considerable power to the local élite at the time of the First World War. From 1916, Filipinos controlled both houses of congress and directed much of the national administration, with limited oversight from an American governor-general. At the same time, the US set up the Philippine National Bank (PNB) as a well-capitalised state development bank to support modernisation; it held government deposits, issued notes and traded foreign exchange. Unfortunately, a combination of devolved political power, a weak bureaucracy unable to restrain businessmen-turned-politicians, and a large bank stuffed full of money proved to be a poor combination. From the outset, PNB’s loan book grew on the basis of political favours extracted by powerful agricultural families. Directors of the bank, and their associates, were among the biggest borrowers. When local government deposits and foreign reserves held in New York ran out as a source of loans, PNB – as a quasi-central bank – was able to print money to fund further lending. By 1921, after only five years of devolution, local godfathers had not only reduced Philippine National Bank to insolvency, they had undermined the currency and left the central government on the edge of bankruptcy.
It was an impressive start by the tycoons and a harbinger of things to come after independence in 1946. In this era, the emphasis in the financial sector switched to the creation of new private banks, concurrent with legal constraints on the activities of foreign institutions. The number of private commercial banks increased from one in the late 1940s to thirty-three in 1965. Paul Hutchcroft, the leading academic specialist on the Philippine financial system, observes: ‘Nearly every major family diversified into banking.’20 Government, which became the plaything of the business oligarchy, supported the new banks with low requirements for capital, state deposits, central bank relending and guaranteed foreign exchange swaps. The families behind the banks, meanwhile, took the money in them and lent it to their own companies and those of their friends. As former central bank governor Gregorio Licaros told the Far Eastern Economic Review in 1978: ‘The average Filipino banker is in banking not for banking profits; he uses his bank for allied businesses.’21
No one has ever been successfully prosecuted for illegal related-party lending in the Philippines and yet every bank crisis has involved it. The crises began in the mid 1960s and never stopped. A run on Republic Bank, the third-largest private institution, in 1964 set the tone. The politically well-connected bank’s loan portfolio was able to grow fast because half its deposit base was made up of government money. Huge loans were extended with insufficient or no collateral, and about half of these went to members of the bank’s board. When a run on the bank pushed it to the brink of insolvency, the central bank ordered a takeover by PNB. But Republic Bank’s controlling shareholder, liquor and lumber tycoon Pablo R. Roman, had other ideas. He was elected to a seat in congress at the 1965 election, became chairman of the House Committee on Banks, Currency and Corporations, and sued the central bank for its treatment of Republic Bank. He won a series of cases on the basis that the central bank was ‘arbitrary’ in its behaviour, and he was restored as president of his bank in 1968. Similarly, the supreme court annulled the liquidation order of Overseas Bank of Manila, run by tycoon Emerito Ramos, after it was taken over by the central bank in 1967 because of massive insider lending and other regulatory infringements.
In the Marcos martial law era, the abuse of banks became worse. After promising to rid the country of ‘an oligarchy that appropriated for itself all power and bounty’,22 he and his inner circle of godfathers obtained control of a dozen banks. Lucio Tan, the supreme Filipino godfather who has survived ever since, gained contol of Allied Bank out of the ashes of General Bank and Trust Co. (Genbank), which was stricken by runs in 1976 after it lent out much of its money to its principal shareholders. Tan, who often co-invested with Marcos, and associates ‘bought’ Genbank in a 1977 auction that was held with only three days’ notice. In 1990, the Philippine Commission on Good Government alleged he paid a sum that was less than 1 per cent of Genbank’s estimated value at the time.23 Tan was then granted an entirely new bank licence and Genbank became Allied Bank, which went on to benefit from a stream of central bank loans and central bank guarantees of foreign borrowing; in two years it was the third-biggest bank in the country.
Tan had at least proven himself in business before, unlike most Marcos cronies. Roberto S. Benedicto, Marcos’s classmate at the Philippines Law School, favourite golf partner and frequent business front, was first handed the chairmanship of the Philippine National Bank and later allowed to take over two private banks. He and his friends plundered them all; one of the institutions, Republic Planters’ Bank, was able to fund half its lending with central bank funds.24 Herminio Disini, who married Imelda Marcos’s first cousin, was also given control of two banks; the money in them saw him expand from an office with one secretary and a messenger in 1969 to a 50-company conglomerate ranging from petrochemicals to nuclear power by the mid 1970s.25
Such antics caught up with the Philippines in the early 1980s, when the debt-laden regime defaulted on its foreign borrowings and several banks failed.26 After the departure of Marcos in 1986, however, the government of Cory Aquino bailed out the banking system by issuing high-yielding government bonds and providing additional, cheap government deposits. The cost of this action became apparent in 1993 when the old central bank was closed down with a US$12-billion write-off to be born by the treasury, and hence taxpayers. The annual cost of servicing this debt in the mid 1990s was more than the Philippines’ health budget.27 Those tycoons who did not, like Benedicto and Disini, flee with Marcos, and survived the Philippine Commission on Good Government, found their banks revived with public money and able to enforce cartel pricing that in the late 1990s gave them the best banking margins in Asia. Despite all the trading and production cartels and monopolies sanctioned by Marcos and others in the Philippines, Paul Hutchcroft concludes that the banking sector has always been ‘the country’s most heavily fortified bastion of privilege and profits’.28
Bank Galaxy
Indonesia’s variation on the theme of bank plunder stands out because of the sheer number of banks that were allowed to operate prior to the Asian financial crisis – no fewer than 240. By the mid 1990s every major business in the country, and many lesser ones, had a captive bank, leading to an orgy of related-party lending that teed up the financial system meltdown of 1997–8. Not only did regular godfathers have banks, Suharto’s children had banks, Suharto’s bribe-gathering foundations owned banks and different factions of the military had banks.
As with many bad ideas, Indonesia’s galaxy of banks had its origins in a well-meaning effort to resolve a perennial problem. Like the Philippines and Malaysia, post-independence Indonesia had a long-running issue with state banks that were manipulated by godfathers and corrupt politicians to fund investment projects that did not merit loans. By the late 1980s, the proportion of loans in state banks on which interest or principal, or both, was not being repaid was around one-fifth, and the situation was set to deteriorate further in the 1990s.29 The way forward, government technocrats decided, was to deregulate the financial system and introduce more private banks that would be profit-oriented. Unfortunately, deregulation was implemented without a strong regulatory framework and, more important, the rules that were written were frequently not enforced. The paid-in capital requirement for a new bank was set at just US$12 million. Most banks quickly recouped this investment and raised more capital by listing a minority interest on the Jakarta stock exchange. Between 1988 and the mid 1990s, around 120 new banks were opened. Instead of seeking to maximise returns for their shareholders, however, they became sources of cheap funds for the godfathers who controlled them. Limits on related-party lending were never enforced by the central bank, which also failed to regulate effectively borrowing from overseas. In the wake of the Asian financial crisis, investigators revealed extraordinary levels of exposure to sister companies among the banks of the major godfathers. At Liem Sioe Liong’s Bank Central Asia, loans to affiliates were around 60 per cent,30 versus a maximum legal threshold of 20 per cent. At another of the biggest private banks, Sjamsul Nursalim’s Bank Dagang Negara Indonesia (BDNI), affiliates accounted for more than 90 per cent of lending. It was Nursalim’s wife who, rather taken by I. M. Pei’s Bank of China skyscraper in Hong Kong, asked the Chinese-American architect to build two of them, side by side, in Jakarta for BDNI. The first part of their superstructures can still be seen, a pair of concrete stubs sticking up like giant cigarette ends.
There was no shortage of clues as to where the Indonesian banking sector was headed in the 1990s. It took Edward, the eldest son of the country’s second-richest tycoon, William Soeryadjaya, only three years to create one of the ten biggest banks in Indonesia, lend himself most of its money and blow it on projects around south-east Asia. The collapse of Bank Summa in early 1993, with liabilities of around US$700 million, should have served as a powerful warning.31 Edward Soeryadjaya cost his family control of Indonesia’s main automotive company, Astra, and dropped his father way down the tycoon rankings. But other godfathers bought up the Soeryadjaya assets, the central bank took another debt on to its books and life went on.32 In 1994, one of the big seven state banks, Bapindo, collapsed under the weight of politically directed lending. In 1995 Bank Pacific, a mid-size private bank controlled by the family of former state oil chief Ibnu Sutowo, became insolvent after guaranteeing US$1 billion of high-yield offshore commercial paper, largely to fund investments by other family businesses. The central bank bailed Bank Pacific out, at the taxpayer’s expense.
With the benefit of hindsight, it should have been no surprise when, in 1997, there was a systemic crisis in Indonesia’s financial system. Greg Sirois, who ran a leasing business for Bank Summa before it went bust, says of the tycoon fraternity: ‘Everyone had a bank or two and they were catapulted into a position they were not equipped to deal with.’33 Kevin O’Rourke, a former Jakarta securities trader and author of a major work on the financial crisis, takes a longer view: ‘By revealing the true state of Indonesia’s banking system, the crisis triggered, in effect, a one-off reckoning for decades’ worth of wrongdoing.’34 As in the Philippines, however, godfathers with banks, especially large ones, were protected by the fact that the government dared not let them fail. As the crisis deepened in Indonesia from November 1997, the big tycoon bankers asked for and received central bank loans to cover demand for withdrawals. At least two-thirds of the loans went to the banks of four godfathers: Liem Sioe Liong, Sjamsul Nursalim, Mohamad ‘Bob’ Hasan and Usman Atmadjaya.35 Auditors subsequently discovered that central bank loans totalling IDR45 trillion (then about US$14 billion) were around three times the value of bank withdrawals in the period when they were disbursed. The likely explanation is that the godfathers used much of the balance of the central bank credits to buy foreign exchange (helping drive the rupiah exchange rate down at the height of the crisis) in order to shift their wealth offshore, particularly to Singapore. There is no doubt the godfathers would rather that the crisis had never happened, but when it did their involvement in banking provided an insurance policy for their interests. When the dust settled, the Indonesian Bank Restructuring Agency (IBRA) was left trying to recoup the government and central bank’s money by accepting tycoon assets whose value was often suspect. One of the most high-profile instances was when Nursalim handed over a vast shrimp farm and processing plant, which American investment bank Lehman Brothers valued at US$1.8 billion; two years later IBRA assessors wrote down its value to US$100 million. The total write-off by IBRA when it ended its efforts to clean up the financial crisis in 2004 was US$56 billion; the judiciary refused to accept almost all cases it put forward against debtors.
Where the Money Is
The line attributed to the famous American bank robber Willy Sutton – ‘I rob banks because that’s where the money is’ – would not be an inaccurate job description for a good many Asian godfathers. The havoc that tycoons wrought through their abuse of private and public banks was accentuated by the region’s unusually heavy dependence on bank finance. Before the financial crisis, bank lending accounted for between half and four-fifths of all financial assets in south-east Asian countries, compared with one-fifth in the United States. Lending in these countries in the decade before the crisis was fuelled by an average annual increase in domestic bank deposits of more than 20 per cent, as household savings rates increased. The metric was simple: ordinary people put their money in banks and godfathers took it out to finance their investments, driving a six-fold lending increase across Thailand, Malaysia, Indonesia and the Philippines between 1986 and 1996.
The financial system would have been much safer if it had been diversified across banks, equities, bonds, leasing and other instruments in a manner more similar to Europe and America. As will be seen below, equity markets in the region were expanding fast from the 1980s, but they were still relatively small and heavily manipulated by insiders. Bond markets were about one-tenth as important, in relative terms, as in developed countries. There are many reasons for this, but the simplest one is that it was just too easy for south-east Asia’s economic aristocracy to get money out of banks. Everywhere in the world, commercial banks are problematic – Nobel Prize-winning economist Merton Miller dubbed banking ‘a disaster-prone nineteenth-century technology’36 – but in the context of south-east Asia, banks were a disaster guaranteed to happen.
Perhaps the most refined and gentlemanly exponent of bank plunder was the venerable Singapore-based godfather Khoo Teck Puat, who died in 2004. He was a typical tycoon in most respects, born into a wealthy family, the son of Khoo Yang Thin, an investor in several Singapore Hokkien banks that were merged into Oversea-Chinese Banking Corporation (OCBC) in 1933. He was constantly at pains to demonstrate his simple tastes – wearing cheap clothes and buying his lunch from market stalls – while he also kept a fleet of Rolls-Royces, Mercedes and BMWs. Khoo began working at OCBC and rose to the position of deputy general manager. However, he never had control of the business. In 1959 he left and started Kuala Lumpur-based Malayan Banking Corporation, which expanded extremely rapidly, opening a hundred branches across Malaysia and Singapore in only six years. A good portion of the funds were lent out for Khoo investments, particularly in real estate, including the beginning of his large hotel portfolio in Singapore. Rumours about the scale of Khoo’s lending to himself, however, precipitated a run on the bank in 1966 and the Malaysian government forced him to give up control.
Khoo’s next bank venture was in Brunei. He persuaded the then sultan, Omar Ali Saifuddien III (father of the current sultan), to let him establish the National Bank of Brunei in 1965. Various members of the royal family were involved as minority shareholders of the bank, which was the only one domiciled in the tiny state and subject to minimal prudential oversight. Khoo was soon making large loans to himself to expand his real estate holdings in Singapore, Australia and elsewhere. The arrangement endured for two decades until Sultan Omar died, in 1986, and his son hired American investigators to examine the National Bank’s books. The loan exposure to Khoo companies was overwhelming and the new sultan shut the bank down. Khoo managed to avoid arrest, probably because he scrambled to sell assets and reached a settlement with the Brunei treasury. His son Khoo Ban Hock, who had been bank chairman, served two years in prison. The great irony of Khoo’s bank adventures was that the same year that the National Bank of Brunei went down he invested US$300 million in Britain’s Standard Chartered. That investment in a properly regulated bank was worth US$2.7 billion when Khoo died, his key asset. He also retained most of his Singapore property interests, including the Goodwood, York, Omni Marco Polo, Orchard Parade and Holiday Inn hotels.
And Then There Were Stock Markets
South-east Asia’s high savings rates, most of which flowed into bank deposits, lent themselves to outsize banking systems, which invited godfather abuse. There is, in turn, a pretty direct line from the insider manipulation of regional banks to the Asian financial crisis. The ‘over-banked’ nature of south-east Asia also helps explain a conundrum that has occupied some of the region’s equity investors: why, despite heady economic growth, have long-term stock market returns in south-east Asia been so poor? Since 1993, when a flood of foreign money increased capitalisation in regional markets by around 2.5 times in one calendar year,37 dollar-denominated returns with dividends reinvested (what investors call ‘total’ returns) in every regional market have been lower than those in the mature markets of New York and London, and a fraction of those in other emerging markets in eastern Europe and Latin America.38 Between the beginning of 1993 and the end of 2006, dollar returns in Thailand and the Philippines were actually negative; their stock markets destroyed capital. Returns in Malaysia and Indonesia were worse than leaving money in a high street bank account in an era of unusually low interest rates.39 Singapore produced less than half the gain of London or New York. Only Hong Kong approached developed market returns, but managed half those in Latin America and one-third of those in eastern Europe. Stock market performance was better in the late 1980s, but this was of little consequence to most investors because south-east Asian exchanges were so small at the time that they had almost no asset allocation from international money managers. Even if one goes back to the end of 1987, when the most commonly used Morgan Stanley Capital International (MSCI) indices for Asian emerging markets were established, every south-east Asian bourse except Hong Kong has underperformed the equity markets of the United States and the United Kingdom.40
A part of the explanation for the disappointing returns in south-east Asia’s stock markets is almost certainly the collateral impact of the region’s super-abundance of savings that are kept in banks. This pushes down borrowers’ cost of funds – particularly when the borrower controls the bank – and reduces general returns on capital. The whole of Asia suffers from the perverse curse of high savings rates and bloated banks, which have depressed stock market returns throughout the region. Long-term returns on equities have also been poor in developing north-east Asia, in Taiwan and South Korea,41 but southeast Asia has been worse. There the impact of high private savings concentrated in banks combined with the weakest prudential supervision of banks to create minimal pressure on capital markets to offer decent returns. Looked at another way, why work hard to increase a company’s stock price and pay dividends when all the capital you need is available at a real interest rate close to zero per cent from a bank whose board you control? It should be no surprise that the best stock market returns in south-east Asia come from Hong Kong which – even if Y. K. Pao and K. S. Li were critically beholden for their success to their relationships with a heavily protected Hongkong Bank – has much the most commercially driven banking system in the region. As mentioned above, no one stockholder was allowed to own more than 1 per cent of Hongkong Bank’s equity, which probably explains why HSBC is the only global bank to have grown out of south-east Asia.
When reflecting on the region’s high growth and low stock market returns it is also helpful to remember that here the universe of listed companies does not reflect the real economy. This is unusual. Japan, South Korea and Taiwan – not to mention London and New York – have branded, technology-developing export companies that are traded on their bourses alongside banks, insurance companies, retailers and the rest. But the export sector which propelled the economic lift-off in south-east Asia was dominated by multinational companies that do not have listings in their host countries; and nor do the global retailers that profited handsomely from the region’s ability to cut manufacturing costs. Instead, south-east Asian markets are dominated by a few big players in services and construction – to wit, our godfathers. This is even the case in Hong Kong, which does at least boast a few globally competitive businesses (like HSBC). If ten mainland Chinese businesses are stripped out of Hong Kong’s Hang Seng index, eight of the remaining twenty-four companies are tycoon real estate companies,42 while four are tycoon-controlled utilities. Several other companies are godfather businesses – the family of K. S. Li alone controls five Hang Seng constituent stocks. In other words, buying equities in south-east Asia is fundamentally about buying into the godfather business model; it does not allow the investor to access the foreign trade and globalisation story that has driven the region’s economies. This is another reason why south-east Asian stock markets are always likely to underperform expectations.
Finally, south-east Asia’s godfathers have not been shy about expropriating minority shareholders. Stock markets provide an excellent stage for the talents of tycoons – complex financial engineering, opaque interplay between public and private companies and the potential to ramp and bludgeon individual stocks by the timely release of insider information. Ever since the first London brokers arrived in Hong Kong in the early 1970s, triggering the first great speculative bubble in the region, it has been clear that the combination of an ill-informed public, the godfathers and a supply of scrofulous foreigners is a bad one for the minority investor. The standard for a generation of regional stock market disappointment was set by that original Hong Kong bust. In 1973, the Hang Seng index was ramped up and up to a March peak of 1,775 points before freefalling to 150. Simon Murray, then a neophyte greedy expatriate manager working for Jardine, Matheson, recalls he was punting £60,000 in the market – most of it borrowed – at a time when his salary was £2,000. He went skiing as the market hit its peak. Out on the slopes one day he suddenly realised that a cryptic telex he had received – ‘BS156’ – referred to his Butterfield and Swire stock,43 whose price had increased nine times. He crossed his skiis, he says, and wiped out, thinking of all the money. Unfortunately, the index dropped to 820 before he finished his holiday, and to 420 before his plane landed in Hong Kong. ‘That was my last visit to the stock market for quite a long time,’ he recalls.44
Sir William Purves who, unlike Michael Sandberg, is not the speculative type, remembers the era for the piles of initial public offering (IPO) prospectuses and related paperwork that impeded the normal functioning of the Hongkong Bank. ‘It was shambolic,’ he says. ‘There was so much physical paper that people could not get into the bank on IPO days.’ Purves attempted to hire Hong Kong island’s Cathedral Hall as an IPO processing centre to keep the investor frenzy out of his bank, but the Anglican church refused to have Mammon in its building. Instead, he obtained the use of the St John Ambulance station up Hong Kong island’s Garden Road ‘in the hope the climb would put people off’, which of course it did not.45
Behind the droll anecdotes, however, is the standard south-east Asian tale of godfather manipulation, ordinary folk losing their shirts and the shameless behaviour of gweilo running dogs. The defining characteristic of the 1973 bust was that, in the words of Purves, ‘The boom was pushed along to a great extent by London brokers.’46 Post-crash, the prices of many well-known stocks that listed in early 1973 – such as Cheung Kong and New World – dropped to a tenth or less of their IPO levels. First and foremost among the London brokers was Vickers da Costa. It is surely telling that three of the senior executives at the London house that led market making activities in Hong Kong at the time would subsequently end up on the wrong side of trading-related court cases. Philip Tose – ‘Tosey’ to his public schoolboy followers – was eventually banned from Hong Kong directorships for his part in the downfall of Peregrine (which in many respects was a 1990s reincarnation of Vickers da Costa, employing many of its former personnel). The second person was Ewan Launder, a Vickers director who went on to be managing director of HSBC’s investment bank, Wardley, which began its life as a joint venture with Vickers with Michael Sandberg responsible for setting it up and for approving senior management. Ewan Launder fled Hong Kong when it became clear he would be prosecuted for receiving large payments from Sandberg’s friend George Tan, after the collapse of his Carrian group in 1983; Launder spent a decade on the run before being arrested in Britain. He was eventually found guilty of accepting HK$4.5 million in return for granting Tan loans and sentenced to five years in prison, only to get off on appeal; Hong Kong’s Court of Final Appeal cited grammatical errors in the charges that had been laid. The third person, Geoffrey Collier, was one of Philip Tose’s original research analysts at Vickers in Hong Kong, who rose quickly through the ranks and went on to work for Morgan Grenfell in London, as joint global head of equities. That was a mistake. Under a more rigorous UK judiciary, Collier became the first person in Britain to be convicted of the newly criminalised offence of insider trading, in 1987.47 He made the insider trades for which he was convicted through old friends at Vickers. The school for scandal theme at Vickers did not end there. In the course of the 1990s, several more directors from the 1980s were censured or convicted for insider dealing and other offences.48 The obvious point is that before we deconstruct the godfathers’ listed businesses to see how they have shafted the minority investor, it is important to bear in mind that the foreign broking and investment banking communities have frequently been hewn from the same moral block.
Welcome to the Web
The basic mechanism for the expropriation of minority shareholders in southeast Asia is the conglomerate web, through which a godfather exercises enormous but opaque power over myriad different companies. Regular businesses – a General Electric, a Tesco, even an HSBC – have a single listed vehicle. But a godfather business has fifteen or even twenty listed vehicles that can be readily identified, with minority positions in many other listed firms that are harder to spot. As a typical example, Quek Leng Chan, Kuala Lumpur-based billionaire nephew of the late Kwek Hong Png and cousin of the Singapore-based billionaire Kwek Leng Beng,49 has nineteen clearly identifiable listed subsidiaries. These are engaged in activities ranging from banking to air-conditioner manufacturing to real estate. Quek is then also present as a small but significant investor in other listed vehicles where his ownership is harder to detect and, separately, owns scores – probably hundreds – of private companies. It is the interplay between these declared public subsidiaries, untrumpeted listed companies in which the godfather has an interest, and private companies – which in most Asian jurisdictions file no public records50 – that defines much tycoon activity. Another multi-billionaire godfather, who reckons to control somewhere between 300 and 400 companies – including about a score that are acknowledged public subsidiaries – observes: ‘We sometimes set up fifteen companies in a month.’51
After the Asian financial crisis, the World Bank commissioned a group of economists and researchers at the Chinese University of Hong Kong to review ownership data on more than 2,500 Asian public companies – spanning Japan and South Korea as well as south-east Asia (but not China) – in order to better understand the region’s corporate webs.52 The results, if they are to be believed, are stunning. The researchers concluded that the eight largest conglomerates in the region exercise effective control over a quarter of all listed companies, while the top twenty-two conglomerates control one-third of listed vehicles. The identity of the top eight conglomerates was not made public at the time, but can be revealed here: six of the eight were big Japanese industrial conglomerates (or keiretsu) – as would be expected given Japan’s industrial cross-holding tradition – and two were south-east Asian. These last two were the groups of Li Ka-shing and Malaysia’s Sime Darby, the latter connected with several powerful overseas Chinese families, as well as the Malaysian government.53 Each of the eight groups was determined by researchers to have more than twenty affiliate listed companies at the level of 10-20 per cent ownership, in addition to their more transparent public subsidiaries.54 The main aim of the researchers was to analyse the structure of the relationships in the conglomerate webs in order to understand how they work. What they discovered, again and again, is that control is exercised through pyramid arrangements that deliver levels of control disproportionate to equity ownership. For example, a company at the apex of a conglomerate pyramid (there may be several different pyramids within the overall corporate web) might own 50 per cent of listed company X, which in turn owns 40 per cent of listed company Y, which in turn owns 30 per cent of listed company Z. As a result, the conglomerate has 6 per cent ownership rights in company Z, but it still has 30 per cent voting rights – enough to call the shots. The researchers used analysis of dividend payouts, which have to be given to all investors equally, to prove that minority investors are systematically expropriated at the bottom of pyramids. This usually occurs at a level of 10-20 per cent ownership where a conglomerate’s stockholding is not widely noted but where it can still exercise control. The principals of the research project wrote a seminal paper for the American Economic Review in which their assertions were, by academic standards, bold: ‘We document,’ they stated, ‘that the problems of East Asian corporate governance are, if anything, more severe and intractable than suggested by commentators at the height of the financial crisis.’ The authors concluded: ‘The concentration of expropriation within a few groups large enough to manipulate a nation’s political system means that the critical issue is the political will to enforce laws and regulations on the books.’55
This last point is critical. A detailed review of what goes on within the big conglomerates reveals that, historically, a failure by politicians to enforce regulatory norms has been at least as important as a shortage of laws in allowing godfathers to get away with their behaviour. In a country like Malaysia, where exemptions from stock market rules are granted without media comment and information about untendered privatisations is subject to official secrecy laws, this is hardly surprising. But the observation also applies in a market like Hong Kong’s. Ever since he hooked up with the Hongkong Bank in 1979 and became part of the economic establishment, the career of Li Ka-shing, the paragon of godfathers, has been one long series of often inexplicable exemptions from stock market rules. When Hutchison took over Hongkong Electric in 1985, Li was exempted from a general offer despite exceeding the 35 per cent ownership trigger. When Hutchison increased its stake in another Li web company, Cavendish, from 23 per cent to 52 per cent in 1987, he was exempted from a general offer. Similar exemptions were granted in the same year when Li increased his personal stake in Cheung Kong above 35 per cent and Cheung Kong increased its stake in Hutchison above 35 per cent; in these instances Hong Kong’s financial secretary contradicted and overruled the stock exchange’s takeover committee. In the 1990s, Li caused jaws to drop when he secured a series of extraordinary exemptions for his internet subsidiary, Tom.com, allowing it to issue new shares within six months of its IPO, to give staff options up to 50 per cent of the value of the firm’s capital base (10 per cent is the rule), and to allow major shareholders to sell down their stakes after six months rather than the statutory two years. The Tom.com experience turned Li’s reputed paramour, Solina Chau Hoi-shuen, into an overnight US dollar billionaire – at least on paper.56 The bigger point is that stock market regulations appear not to apply to major godfathers, even in Hong Kong.
The indulgence shown to Li Ka-shing’s listed companies over the years draws attention to some of his key working relationships. The link to Hong-kong Bank, whose chairman in the colonial era was always said to be more powerful than the governor, has been established. Almost as important has been the link with Charles Lee Yeh-kwong, one of the principals of the law firm Woo, Kwan, Lee & Lo,57 who is both K. S. Li’s lawyer and key adviser. As well as legal work on investment deals, Woo, Kwan, Lee & Lo does much of the conveyancing for the property arms of Cheung Kong and Hutchison. ‘Imagine 2 per cent of all that,’ drools a senior K. S. Li executive.58 At the same time Charles Lee, who bears a passing resemblance to Toad of Toad Hall, was chairman of Hong Kong Exchanges and Clearing Limited, which runs the Hong Kong stock and futures markets, in 1992–4 and 2004–6; he is still an Executive Councilor. Another long-time K. S. Li associate, contractor and Li company director, the former real estate and construction functional constituency legislator59 turned Executive Councilor Ronald Arculli, took over as chairman of the exchanges in April 2006. That same year, he was made chairman of the Hong Kong government’s focus group for financial services reform, whose theoretical aim is to improve markets’ functioning in the interests of general investors. Elsewhere, these palpable conflicts of interest would cause a political storm; in Hong Kong they barely register.
Don’t Rock the Boat
The political cover given to godfathers around the region is both proactive and reactive. The first kind occurs when deals and favours are given to the tycoons. But the second kind, when politicians step in to defend the nexus between the political and economic élites that has existed for generations, may be just as important. Again, it also applies in Hong Kong.
A classic example occurred in 1987 when a young, brash Robert Ng, son of Singapore billionaire Ng Teng Fong, was speculating wildly in the Hong Kong futures market just as the market crashed in October that year. He had 12,000 long futures contracts, leaving him with a paper liability of just over HK$1 billion. Robert was punting the market through two Panamanian-registered companies and initially sought to deny responsibility for the debts on the basis of limited liability. Hong Kong’s Commercial Crime Bureau (CCB), however, found prima facie evidence that there was collusion between Ng and one of the firms broking the futures contracts, which allowed him to avoid paying in margin as the market declined. This would be illegal.
The CCB unearthed a high-quality informant and armed itself with warrants to search more than twenty addresses. Senior officers were convinced that, for the first time, they were about to nail a major godfather. It never happened. At a series of meetings of minister-level government officials, culminating in an encounter at the governor’s country residence at Fanling, it was decided that taking on Robert Ng posed a risk to the stability of the overall market; why this should be was never explained, publicly or privately.60 The police were devastated. One of the senior officers recalls: ‘[Chief of staff of the CCB] Russ Mason came back and said: “That’s it boys. Not in the public interest.”’61 Instead of an investigation, Robert Ng was cut a deal that allowed him to repay around 60 per cent of what he owed over eight years (equivalent to an immediate repayment of about half). The rest of the tab was picked up by foreign brokerages, which were strong-armed into making contributions by the Hong Kong government, and local taxpayers.
Interestingly, the person the police were allowed to pursue was Ronald Li, who was running the stock exchange at the time of the 1987 crash. Li made his fortune by requiring personal allocations of stock when approving IPOs and ran the exchange as a personal fiefdom. But it was his decision to shut the bourse down for a week in 1987, which caused great damage to Hong Kong’s international reputation in money markets as well as undermining futures contracts, that saw the colonial power turn on him. Li was tried over share allocations in the listings of Cathay Pacific Airways and Novel Enterprises – even though it meant pointing up in public the collusion of Hongkong Bank subsidiary Wardley in the share allocations – and was sentenced to four years in jail. He was made a rare example. The policeman quoted above observes: ‘[Former New York Attorney General] Eliot Spitzer62 would have a field day here. They’d all be going to jail. One after the other.’
Thankfully for the godfathers, south-east Asia is not New York and brazen treatment of minority investors and the general public passes for regular business. It was notable when Tung Chee-hwa became Hong Kong’s first post-colonial chief executive that his own history of shocking corporate governance elicited barely a murmur. The media was interested in the fact that Henry Fok had engineered a bail-out of Tung’s main company in the 1980s because it provided circumstantial evidence that Tung was beholden to Beijing, whose state banks provided most of the financing. But the deeper story was that Tung, the less gifted son of the late billionaire shipping tycoon C. Y. Tung, was in trouble in the first place because he engaged in exactly the same abuse of listed companies that other godfathers go in for. In the early 1980s, after Tung Chee-hwa took over the family empire, he authorised and maintained hundreds of millions of US dollars of loans from his main listed vehicle, Orient Overseas (Holdings) Ltd (OOHL), to what he called the Tung Private Group, a euphemism for more than 200 private companies he controlled. These loans, which no sane minority investor in OOHL would have wanted to make, were frittered away and otherwise blown on bad investments whose returns – had their been any – would have accrued to the Tung family alone. When OOHL was restructured in late 1986, the public company wrote off US$156 million of the loans it had made to the Tungs’ private businesses. The crop-haired godfather sent a personal note to investors on 10 November that read: ‘In the course of 1985 the OOHL Group’s financial position seriously worsened principally as a consequence of the rapid deterioration in the financial position of the Tung Private Group, with which the OOHL Group is closely associated and from whom substantial amounts were owing.’ Needless to say, there was no apology for the misuse of shareholder funds.63
The Art of the Kill
Tung-the-son is in fact not clever enough to skewer and execute minority investors with true godfather aplomb – as if they were bulls to ritual slaughter in a Spanish ring. The real matadors can abuse other investors in a public company a hundred ways before they even notice and then, with a poker face, proceed to the perfect denouement – an offer to take a lacerated public business back into private hands for a fraction of the value of its assets. When the game is played properly there are no bail-outs or embarrassing, forced restructurings. It is an art form in which the godfather is always in charge. Robert Kuok, whose listed businesses have a long track record of underper-forming the broad indices of the markets in which they are traded, is a master. For many years he had a Singapore-listed dry bulk shipping company called Pacific Carriers Ltd (PCL), whose price and dividend performance were so appalling that the counter became known to traders as Please Cut Losses.64 In 2001 Kuok took PCL private at a hefty discount to its net asset value (NAV – or the book value of the company’s assets). Hardly had the wounds of minority investors in the Singapore market healed when the tycoon announced, in October 2003, that he was launching an IPO of a PCL subsidiary, Malaysian Bulk Carriers (MBC), up the road on the Kuala Lumpur exchange. Kuok had already sold 30 per cent of MBC to the Malaysian government at a healthy price and his local investment bank, run by the deputy premier’s brother65, ensured the IPO was an aggressively valued success. Kuok then sought to relieve long-suffering investors in his Hong Kong property arm, Kerry Properties, with an April 2003 privatisation offer at a discount of 53 per cent to net asset value. He bawled out his chief financial officer when minority investors failed to bite. In recent years Lee Shau-kee has attempted three privatisations at discounts of around 40 per cent to NAV; Y. K. Pao’s son-in-law Peter Woo made an offer for a listed retail subsidiary that one analyst estimated to be a 100 per cent discount to NAV – and, after a modest increase in the offer, succeeded; Cheng Yu-tung sought to buy back his New World TMT for a few cents on the dollar; and K. S. Li’s son Richard made a brilliantly devious attempt to privatise his Sunday mobile phone business on the cheap.66 As Peter Churchouse, former managing director of Morgan Stanley in Asia, says of these businessmen: ‘They make investment bankers look like school boys.’67
Of course, a listed business has to be weakened before it can be bought back cheap. Peter Woo’s Lane Crawford department store, held in his listed vehicle pyramid through apex company Wheelock, posted US$72 million in losses in the five years prior to its 1999 privatisation; the firm did not even deliver earnings in the boom that surrounded Hong Kong’s 1997 reversion to Chinese rule, allowing it to be bought back for no more than the value of its own stock portfolio and real estate. The Wheelock web of companies, in fact, was used as a case study of investor-unfriendly practices by the World Bank-funded researchers at the Chinese University of Hong Kong (CUHK). They showed how smaller businesses at the base of Wheelock’s ownership pyramid are used to provide cash to their corporate owners and to take on disproportionate risk in joint investment projects.
A quintessential example of a south-east Asian listed company project occurred in 1997 when Wheelock, its first-tier listed subsidiary Wharf, two second-tier listed subsidiaries, New Asia and Harbour Centre, and a third-tier subsidiary, Realty Development, each took a 20 per cent interest in a real estate development above a public rail station called MTRC Kowloon Station Package Two. The researchers showed how funding for the project came from Wheelock’s subsidiaries and that in many cases the loans were interest-free. Wheelock itself was the only net borrower in the inter-company joint venture; with cheap financing and minimal risk but an equal share in any upside, the company closest to Peter Woo could hardly lose. In 1999, the three least-owned subsidiaries in the Wheelock pyramid were lending the equivalent of between 60 per cent and 160 per cent of their market capitalisations to the joint venture project. The CUHK professor of finance Larry Lang described them as ‘automated teller machines’ controlled by Wheelock. At the same time, because the real estate development was a joint venture, it was not subject to normal reporting requirements. Hong Kong listing rules apply only to listed companies and their subsidiaries; everything else – which is a lot – is off the radar screen. It should come as no surprise that the stock market performance of New Asia, Harbour Centre and Realty Development has been lousy. In February 2003 Peter Woo privatised Realty Development back into New Asia at an unusually generous 19 per cent discount to NAV.
The listed company joint venture scam is an old Asian favourite, particularly in Hong Kong. The reason that K. S. Li’s Cheung Kong mothership owns 49.9 per cent of Hutchison and not more is that this means joint ventures between the two businesses, which are many and large, are not subject to regular reporting requirements. Management contracts, supply deals and other asset trades do not face transparent scrutiny. The true debt, asset and liability positions of joint ventures cannot be reviewed by outsiders. A vast K. S. Li project that demonstrated this occurred in the early 1990s when Hutchison subsidiary Hongkong Electric vacated its old power station and oil depot at Ap Lei Chau, on the south side of Hong Kong island. The best way for Hongkong Electric to maximise the value of its vast site, connected by a bridge to a prime residential area, would have been to tender it for development among different property developers. Instead, Hongkong Electric was pulled into the inevitable joint venture with Cheung Kong and Hutchison. Together they put up thirty-four towers and two shopping malls without ever having to provide Hongkong Electric shareholders with detailed accounts of the project’s costs and management. One can only guess what average returns in the Hong Kong stock market – which have been far better than elsewhere in south-east Asia – would have been if minority shareholder interests were treated on a par with those of the tycoons.
This does not happen, and what investors see again and again is that really good deals go to godfathers’ private companies, while outsiders are left with the rest. Or as Li Ka-shing’s former manager Simon Murray puts it: ‘Would anybody put crap in their own company when they can sell it to the public?’68 The difference is captured by the unbelievable rubbish – senseless new media projects, infrastructure dog-ends, mainland China mistakes – to be found in the listed businesses of New World group’s Cheng Yu-tung versus the cash-generating beasts he owns privately. The best known of the latter is his long-time interest in Stanley Ho and Henry Fok’s Macau gambling franchise. A typical recent addition came in 2001 when Cheng and tycoon pals the Lau brothers saw an opportunity to acquire Japanese department store Sogo’s Hong Kong operation. It was a good business with a great location, but carried a lot of debt and was mired in Hong Kong’s worst retail recession in a decade. Cheng and the Laus used their private companies to buy Sogo, pay off part of its debts and secure cheaper bank funding. At the time of acquisition, the rental yield on the Sogo building was already a healthy 9-10 per cent, but Cheng’s and the Laus’ listed businesses did not get a sniff of the deal. The new owners undertook some ruthless cost cutting and then, as the mainland Chinese economy heated up in 2003, announced a second Sogo project above the new subway on Shanghai’s key retail thoroughfare, Nanjing Road. In April 2004, the Sogo stores were listed in a Hong Kong initial public offering and Chow Tai Fook, the private Cook islands-registered company that Cheng Yu-tung inherited from his wife’s family, booked an enormous profit. At that point shares in Cheng’s listed flagship, New World Development, were worth less than they were in 1986. The late Gary Coull, co-founder of Credit Lyonnais Securities Asia (CLSA), was close to Cheng, helped him list companies and served on the board of New World Infrastructure and New World TMT.69 In the end the stockbroker admitted: ‘He [Cheng] made a lot more money in private companies … Investors who have invested in New World at the macro level have been pummelled.’70
Since the first significant foreign money arrived in south-east Asia’s capital markets in 1993, that has been a pretty good rule of thumb for investments in godfather businesses. Once again, however, it must be stressed that this is not a racial point about investing in ethnic Chinese tycoons. The point transcends race. When Sri Lankan Tamil Ananda Krishnan bought the valuable Chinese movie back catalogue of Celestial Films, he did exactly what Robert Kuok would have done. He purchased it with a private company and then sold it at what one of his investment bankers calls ‘a fat profit’ to his listed media business, Astro.71 If one seeks the worst record of corporate governance in the region over the past thirty years, a serious contender has to be Jardine, Matheson, the original white godfather business. On a fully adjusted basis, shares in Jardine Matheson Holdings (JMH), the apex company in the group, were worth more in 1973 than they were in 2003. The Keswick family, who claim to be descended from William Jardine’s niece, have treated minority investors in a manner that would make many godfathers blush. In the mid 1980s they created a corporate cross-holding structure within their listed company web that allows the family to run the group despite owning less than 7 per cent of JMH. At the same time they were pioneers in buying back stock on the cheap from subsidiaries they had run into the ground. The cross-holdings themselves were made possible by reincorporation and relisting in Bermuda, where the government of the British-controlled tax haven was pre-vailed on to write takeover laws that applied only to five Jardine companies and which help the Keswicks hold on to their inheritance. None of this, of course, did anything for minority investors, who may be forgiven when they refer to Jardine’s Hong Kong headquarters, with its distinctive little round windows, as the Tower of a Thousand Arseholes.72
Bank, Banks, then Markets
In the aggregate, despite the pyrotechnics of the capital markets, south-east Asia’s banks have been much more important to the godfathers’ access to capital story. With such a high proportion of the region’s savings mediated by banking systems, this is macroeconomic inevitability. The relationships between Hongkong Bank and Y. K. Pao and K. S. Li, Bangkok Bank and a who’s who of Thai, Malaysian and Indonesian godfathers, Filipino and Indonesian banks and the kleptocrat tycoons that those island chains have spawned, and so on, are the underlying plot. As a rule of thumb, the greater the control that godfathers have exercised over banks, the greater has been the collateral damage they have inflicted on their fellow citizens. Widely held Hongkong Bank, for all that can be said against its long-term quasi-monopoly position, has never come close to a crisis; it is also one of the few listed businesses in south-east Asia to have given stockholders the kind of long-term returns that textbooks suggest they should expect in emerging economies. The systematic plunder of banks in the Philippines and Indonesia, on the other hand, has not only fleeced minority investors, it has crippled entire economies.
Stock markets came later than banks, and played a lesser role. Despite popular perceptions to the contrary, less than 15 per cent of adults in most south-east Asian territories own shares directly, even today; the proportion in Hong Kong, the leading share owning society, is 28 per cent.73 None the less, the rather shocking returns in south-east Asian markets since the early 1990s – blame excess savings if you are a macroeconomist, blame the godfathers if you think individuals determine life’s outcomes – do have a secondary impact. This is because Asia, and particularly south-east Asia, are the global capitals of forced public saving. Malaysia, Singapore and the Philippines have mandatory provident funds that date from the colonial era74. Indonesia started a mandatory pension fund for company employees in the 1970s, and Hong Kong added its Mandatory Provident Fund in December 2000. Thailand plans such a fund. As more forced Asian saving is directed into regional stock markets it will, unless the trend of low long-term returns changes, make ordinary people more exposed to the markets’ poor performance.
This subject, however, is a tricky one to assess for two reasons. The first is that south-east Asians are already habituated to poor returns on forced savings. By the calculations of one academic, in Singapore in the period 1987–97, when the Central Provident Fund was overwhelmingly invested in government bonds, the annual return was close to zero.75 The second issue is that south-east Asian governments are so secretive about what happens to forced savings that it is impossible to identify any trends with certainty. Singapore’s Government Investment Corporation (GIC), which is one of the ultimate investors of Central Provident Fund balances, only revealed the composition of its board of directors in 2001. Harry Lee Kuan Yew, who chairs the board, claimed in 2006 that the average annual real return over twenty-five years at the GIC had been a healthy 5.3 per cent. Other information revealed at the time suggests the gains are a function of the fact that the GIC invested three-quarters of its money in the United States, Europe and Japan; Singaporeans must hope this asset allocation is maintained.76 Both the International Monetary Fund and credit rating agencies like Standard & Poor’s continue to criticise Singapore’s unwillingness to provide detailed information on its management of public money. In Malaysia, the allocation and management of forced savings is still more of a black box, with critics alleging that short-term payouts from the Employees Provident Fund (EPF) have only been maintained by raiding its capital base and using transfers from other public sources, such as the Malaysian government’s investment vehicle, Permodalan Nasional Berhad. The only sure thing is that, as elsewhere in the region, there is no reliable set of accounts available to the public.
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